THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

RIVERSIDE 


GIFT  OF 

mus  Donor 


WAGES    AND    CAPITAL 


AN   EXAMINATION   OF 
THE   WAGES   FUND   DOCTRINE 


^       BY 

F.  W.  TAUSSIG 

PROFESSOR    OF    POLITICAL    ECONOMY    IN    HARVARD    UNIVERSITY 

AUTHOR    OF    TARIFF    HISTORY    OF    THE    UNITED    STATES,     1789-1888, 

THE    SILVER    SITUATION    IN    THE    UNITED    STATES,     ETC. 


NEW    YORK 
D.    APPLETON    AND    COMPANY 

1898 


H83o/ 


COPYRIGHT,    1896, 

BY  D.   APPLETON  AND  COMPANY. 


PREFACE. 


I  HAVE  divided  the  present  volume  into  two  parts:  a 
first,  of  five  chapters,  containing  a  statement  at  large  of 
my  own  views  on  the  relation  of  capital  to  wages,  and  on 
the  wages  fund  doctrine  ;  and  a  second,  of  nine  further 
chapters,  in  which  the  history  of  the  wages  fund  discus- 
sion from  its  beginning  to  the  present  time  is  followed. 
At  the  close,  a  final  chapter  gives  a  brief  summary  of  both 
parts.  In  this  arrangement  I  have  departed  from  the  tradi- 
tional plan,  and  perhaps  from  the  strictly  logical  plan.  It 
has  been  customary,  in  critical  and  historical  inquiries  as 
to  one  or  another  phase  of  economic  theory,  to  begin  with 
the  history  and  criticism,  and  to  close  with  the  statement 
of  the  author's  final  conclusions.  But  criticism  and  com- 
ment proceed  inevitably  from  the  thinker's  own  point  of 
view ;  and  to  weigh  the  conclusions  of  others,  without 
having  explained  one's  own,  necessitates  either  an  inci- 
dental and  thus  unsatisfactory  statement  of  the  grounds 
of  an  opinion,  or  a  considerable  anticipation  of  views 
whose  full  exposition  is  nevertheless  postponed.  I  have 
accordingly  adopted  the  reverse  order,  and  trust  I  have 
been  able  thereby  to  make  at  once  a  briefer  and  a  clearer 
presentation  of  my  opinions. 

I  am  sensible  that  in  the  first  part,  in  which  my  own 
views  are  stated,  there  is  some  elaborateness  of  exposi- 


iv  WAGES   AND   CAPITAL. 

tion  and  some  liberal  reaching-out  to  related  topics.  I 
have  endeavored  to  make  my  meaning  clear  not  only  to 
those  who  have  already  given  some  attention  to  economic 
theory,  but  to  those  who  are  new  to  such  discussions  ; 
and  hence  I  may  have  been  prolix,  and  may  have  ex- 
plained at  needless  length  matters  that  to  many  readers 
will  seem  very  simple.  The  historical  and  critical  discus- 
sions of  the  second  part  are  addressed  more  particularly 
to  special  students  of  economic  theory.  While  not  essen- 
tial for  following  the  reasoning  or  for  weighing  the  con- 
clusions of  the  first  part,  they  yet  consider  aspects  of  the 
wages  fund  controversy  not  to  be  neglected  by  those  who 
would  reach  an  opinion  on  the  subject  as  a  whole. 

I  have  to  express  my  warm  thanks  to  Professor  Maffeo 
Pantaleoni,  who  generously  put  his  well-stocked  library 
at  my  disposal  in  Rome  during  the  winter  of  1894-95  ;  to 
Mr.  James  Bonar,  of  London,  who  read  the  manuscript  of 
some  of  the  earlier  chapters,  and  greatly  aided  me  by  his 
criticism;  and  to  my  colleague  Professor  W.  J.  Ashley, 
who  has  read  all  the  proofs  of  the  volume,  and  offered 
many  helpful  suggestions. 

Two  chapters  have  already  appeared  in  print.  Almost 
the  whole  of  Chapter  III  was  published,  under  the  title 
"The  Employer's  Place  in  Distribution,"  in  the  Quarterly 
Journal  of  Economics  for  October,  1895.  Chapter  XIII,  on 
the  wages  fund  at  the  hands  of  German  economists,  was 
published,  in  essentials,  in  the  same  journal  for  October, 

1894. 

F.  W.  TAUSSIG. 
HARVARD  UNIVERSITY,  November,  1895. 


CONTENTS. 


PART  I. 

CHAPTER    I. 
PRESENT    WORK    AND    PRESENT   WAGES. 

PAGE 

Subject  of  the  volume  ;  necessity  of  considering  the  process  of  pro- 
duction   I 

Diversity  of  immediate  output  of  labor :  tools,  materials,  enjoyable 

goods  ...  .........  2 

Earlier  and  later  stages  of  productive  effort  take  place  simultane- 
ously ............  2 

Some  labor  given  to  making  non-enjoyable  wealth     ....       3 

Some  labor  brings  immediate  satisfaction  ......       4 

The  former  greatly  exceeds  the  latter          .          .          .         .  4 

Most  labor  brings  no  immediate  enjoyment        .....       6 

The  division  of  labor  ;  partly  contemporaneous,  partly  successive  .  6 
Importance  of  the  successive  division  of  labor,  or  extended  period 

of  production        ..........       7 

Difficulty  of  finding  a  simple  example  of  its  use          ....       8 

How  far  the  extension  of  the  period  of  production  is  a  cause  of 

greater  efficiency  of  labor    ........       9 

Difficulty  of  specifying  the  beginning  and  the  end  of  the  period  of 

production  .         .          .          .          .          .          .         .          .          .          .11 

Practically  impossible  to  measure  the  average  period         .         .         .12 
The  period  certainly  long,  and  to  be  measured  by  years    .         .  13 

Possibility  of  some  measure  of  the  last  stage       .         .         .         .         .13 

The  reward  of  present  labor  is  enjoyable  goods  .  .  .  15 

This  simple  fact  often  forgotten,  and  money  returns  thought  of  .  15 
All  members  of  the  community,  laborers  or  not,  get  their  income 

from  the  same  source  .  .16 


VI  WAGES   AND   CAPITAL. 

PAGE 

Where  this  real  income  is  to  be  seen  .......     16 

Wages  paid  from  the  product  of  past  labor 17 

This  fact  obscured  in  common  thought  and  speech    .         .         .         .18 
A  sense  in  which  laborers  can  be  said  to  be  paid  from  current  prod- 
uct        18 

The  early  conception  of  a  store,  or  fund,  whence  wages  came    .         .     19 

Wherein  lay  the  error  of  this  view 19 

Marshall's  conception  of  a  flow  rather  than  a  fund  .  .  .  .20 
Bohm-Bawerk's  conception  of  a  subsistence  fund  .  .  .  .21 
In  what  sense  there  is  a  fund,  in  what  sense  a  flow  .  .  .  .21 
How  far  wages  come  from  current  product  :  the  finishing  touches  to 

real  income  are  given  from  day  to  day  .  .  .  .  .22 
Summary  of  chapter  :  graphic  presentation  of  results  .  .  .23 
Artificial  character  of  any  such  graphic  statement  .  .  .  .24 


CHAPTER    II. 
CAPITAL    AND    WAGES. 

Are  wages  paid  from  capital  ? 26 

The  question  proximately  one  of  phraseology     .         .         .         .         .26 

The  grounds  on  which  definitions  and  distinctions  should  rest  .         .     27 
Historical  sketch  of  the  definitions  of  capital.     Adam  Smith's  defini- 
tion :  that  which  yields  a  revenue        ...... 

The  next  definition  :    wealth  used   for   producing    further  wealth  ; 
partly  fixed  capital,  partly  circulating  ..... 

Supplies  for  laborers  considered  part  of  circulating  capital  in  this 

sense    ............     29 

Such  supplies  are  part  of  real  income          ......     30 

Grounds  for  maintaining  that  laborers'  necessaries  are  to  be  consid- 
ered as  capital      ..........     30 

The  view  that  laborers'  supplies  arc  capital  promoted  by  the  concep- 
tion of "  natural "  wages 31 

Laborers'  wages  not  at  the  minimum  ......     32 

Not  manual  laborers  only,  but  all  classes  of  workers,  must  be  con- 
sidered         ...........     33 

Difficulty   of   maintaining   that    their   necessaries   are    analogous   to 

other  capital          ..........     35 

All  enjoyments  of  the  entire  community  arc  real  income   .          .  36 

"  Capital  "  therefore  will  be  used  to  signify  inchoate  wealth      .         .     36 


CONTENTS.  vii 

PAGE 

Wages,  however,  are  derived  from  capital  even  in  this  sense  .  .  37 
The  existing  sources  of  real  income  partly  a  fund,  partly  a  flow  .  38 
Durable  enjoyable  wealth,  constituting  a  fund,  is  usually  a  reward 

of  past  exertion   ..........     38 

Such  wealth  sometimes  called  capital 39 

The  case  of  hired  dwellings         ........     40 

Usually  real  income  emerges  recurrently  from  capital        .         .         .41 

At  all  events,  over  any  considerable  period 42 

Retail  purchases  practically  signify  the  beginning  of  enjoyment  .  42 
In  what  sense  wages  are  thus  derived  from  capital  .  .  .  .43 

This  proposition  has  nothing  to  do  with  the  relations  of  employers 

and  hired  laborers •  .  .  .44 

The  dealings  of  employers  with  laborers  commonly  associated  with 

the  payment  of  wages  from  capital 45 

Perplexities  arising  from  this  association  :  thus  where  goods  are  sold 

before  wages  are  paid  ........  46 

And  where  the  rigidity  of  the  source  of  wages  is  under  discussion      .     47 

The  preceding  conclusions  apply  not  to  wages  only,  but  to  all  in- 
comes ............     47 

This  wider  result  never  contemplated  by  the  older  economists  .  .  48 
Yet  some  peculiarities  in  the  case  of  hired  laborers,  to  be  considered 

in  the  next  chapter      .........     49 


CHAPTER    III. 
THE   MACHINERY   OF   DISTRIBUTION. 

The  conclusions  of  the  preceding  chapters  are  of  universal  application     51 
The  present  chapter  deals  with  the  existing  machinery  of  distribu- 
tion     .         .         .         .         .         .         .         .         .         .         .         .51 

A  complete  money  regime  assumed    .          .          .          .          .          .  51 

Total  money  income  greater  than  the  price  of  real  income         .         .     52 
The  simplest  case  assumed  :  a  completely  independent  capitalist       .     53 
Such  an  one  free  to  do  as  he  will  with  his  money  income  .         .         -53 
May  or  may  not  keep  his  capital  intact       ......     54 

All  laborers  assumed  to  be  hired  by  such  capitalists  .         .          .          -55 
Laborers  then  dependent  for  money  income  on  capitalists          .          .     56 

Limitation  on  capitalists'  freedom  as  to  real  income  .         .         .         -57 
Real  income  of  capitalists  in  part  predetermined        .         .         .         -57 


viii  WAGES   AND   CAPITAL. 

PAGE 

And  of  laborers  also 58 

Real  income  and  output  at  any  moment  adjusted  to  expected  de- 
mands    59 

Direction  of  real  output  and  income  determined  eventually  by  the 

capitalists'  choice  .........  60 

Maintenance  of  capital  depends  on  intention  of  capitalists         .         .  62 

Modifications  of  the   original  simple  case  :    capitalists  fettered  by 

debts  and  obligations  .........     63 

The  body  whose  choice  decides  the  apportionment  of  money  income 

larger  than  the  group  of  direct  employers  .  .  .  .  .64 
Another  modification  :  the  active  capitalists  are  under  engagement 

to  pay  interest  and  rent 65 

Interest  payments 65 

Mode  in  which  the  disposition  of  investors  affects  the  maintenance 

of  capital     ...........     67 

Rent  payments 68 

A  different  modification  of  the  original  assumption  :  many  laborers 

not  hired  by  capitalists  ........  69 

Are  such  laborers  to  be  regarded  as  receiving  wages  ?        .         .         .71 

The  question  of  nomenclature  and  classification  as  to  earnings  of 

management  in  general  .  .  .  .  .  .  .  .71 

Both  the  active  capitalist  and  the  non-hired  laborer  receive  primary 

and  independent  money  incomes 73 

All  receivers  of  stipulated  payments,  whether  wages,  interest,  or 

rent,  receive  dependent  incomes 73 

How  this  classification  of  incomes  is  related  to  the  traditional  di- 
vision of  distribution  73 

In  what  sense  the  hired  laborer  is  dependent  on  capital     .         .         -75 
In  what  sense  all  laborers,  hired  or  not,  are  dependent  on  capital      .     75 
Confusion  of  these  two  things  in  the  wages  fund  controversy     .         .     76 
How  the  truth  underlying  the  old  doctrine  was  obscured  by  its  as- 
sociation with  hired  laborers        .......     77 

Whether  the  dependence  of  hired  laborers  is  greater  than  that  of  re- 
ceivers of  interest  and  rent ........     78 

The  hired  laborer's  contract  is  for  a  shorter  time  :  which  may  or  may 

not  be  a  disadvantage 78 

The  hired  laborer  must  recurrently  show  his  strength  in  bargaining  : 

hence  the  aid  he  gets  from  labor  organizations    .         .         .         -79 


CONTENTS.  ix 

PAGE 

Bearing  of  these  concluding  remarks  on  the  main  discussion  :  in  what 
sense  laborers  and  receivers  of  interest  or  rent  are  alike  de- 
pendent .......  ....  80 


CHAPTER    IV. 

THE    ELASTICITY    OF   THE   WAGES    FUND. 

Summary  of  preceding  discussion.     Two  senses  in  which  the  elas- 
ticity of  the  source  of  wages  can  be  considered    .         .         .         .82 

First,  the  elasticity  of  employers'  funds      ......  82 

The  direct  employers'  funds  clearly  elastic 83 

The  funds  of  the  entire  employing  class  subject  to  some  limits           .  83 

But  no  rigid  or  predetermined  funds  .......  84 

A  general  combination  of  laborers  would  not  encounter  any  rigid 

obstacle  to  a  rise  in  general  money  wages  .         .         .         .         -85 

Possible  ultimate  effects  of  a  general  rise 86 

Summary  of  conclusions  to  this  point          ......  87 

The  second  question,  as  to  real  wages        ......  87 

This  question  applies  to  all  real  income 88 

General  real  income  largely  predetermined 88 

No  large  margin  over  current  requirements        .         .         .         .         .89 

This,  however,  only  a  general  tendency.     No  rigid  limits  exist          .  90 

Real  wages  subject  to  the  same  limitations  as  real  income  at  large    .  91 

Share  of  real  income  going  to  laborers  :  susceptible  of  increase  proxi- 

mately  by  a  rise  in  money  wages 92 

Such  a  rise  effective  as  to  real  wages  according  to  the  character  of 

existing  supplies 92 

Elastic  limits  again     ..........  93 

By  what  process  improvements  in  the  arts  affect  real  wages        .         .  93 

Effects  of  savings        ..........  94 

Hoarding  enables  participation  in  results  of  current  improvements  .  94 
Investment  means,  for  the  season,  partial  transference  of  income  to 

laborers 95 

How  saving  affects  the  individual's  real  income  .  .  .  .96 
This  qualification  of  the  general  conclusion  not  important  as  to  most 

manual  laborers   ..........  97 

But  very  important  as  to  active  business  managers  .  .  .  -97 

Extent  of  savings  by  these  .  ........  97 


X  WAGES   AND   CAPITAL. 

PAGE 

All  the  conclusions  of  the  chapter  bear  only  on  general  wages  and 

general  income     ..........     98 

CHAPTER   V. 

SOME  CONCLUSIONS. 

Topics  to  be  taken  up  in  the  chapter 

What  may  be  the  practical  bearings  of  the  conclusions  reached  in  the  100 

volume         ...........  100 

In  general,  they  are  slight .........  100 

Attempts  by  particular  sets  of  laborers  to  get  higher  wages  .  .  ici 
Possibility  of  their  success  being  detrimental  to  other  laborers  .  .  101 

Such  a  detrimental  offset  possible 102 

The  answer  to  the  question  necessarily  inconclusive  ....  103 
But  practically  no  ground  for  predicting  the  harm  to  other  laborers  .  104 
The  substantial  obstacles  to  a  rise  in  particular  wages  lie  elsewhere  .  104 
In  the  accidents  of  temper  and  of  momentary  contracts  .  .  .  105 
In  the  disposition  and  prospects  of  the  employing  class  .  .  .  105 
And  ultimately  in  the  demand  for  commodities  from  consumers  .  106 
Back  of  consumer's  demand  is  the  theory  of  final  utility  .  .  .  108 
All  this  bears  on  particular  wages  ;  which  the  wages  fund  discussion 

proper  does  not  touch  ........   109 

Bearing  of  the  wages   fund  discussion  on  residual  theories  of  distri- 
bution         ...........  109 

Historical  retrospect :  profits  the  residual  element  with  Ricardo  .  no 
Wages,  virtually,  the  residual  clement  with  later  writers  .  .  .no 

Wages,  emphatically,  with  a  modern  school in 

But  this  view  not  tenable   .         .         .         .         .         .         .         .         .111 

The  managing  employer  gets  the  residual  share  of  money  income     .   in 

The  independent  laborer  in  a  similar  position 112 

This  conclusion  superficially  like  Ricardo's        .         .         .         .         .   113 

The  residual  share  as  to  real  income  .         .         .         .         .         .         .114 

Is  there  here  any  residual  share?        .         .         .         .         .         .         .114 

The  residual  share  in  the  permanent  working  of  distribution     .         .  115 
This  has  nothing  to  do  with  the  wages  fund  discussion       .         .          .    115 
What  are  the  permanent  forces  at  work      .          .          .          .          .          .116 

Doubtful  whether  any  residual  share  results  from  the  working  of  the 

permanent  forces          .         .         .         .         .         .         .         .         .116 

Illustration  from  general  wages  .         .         .         .         .         .         .         .   117 


CONTENTS.  xi 

PAGE 

A  permanent  rise  in  general  money  wages  must  rest  on  a  rise  in  the 

money  receipts  of  managing  capitalists  .  .  .  .  .  117 
So  where  a  general  rise  in  prices  takes  place  .  .  .  .  .118 
Or  when  increasing  volume  of  production  brings  larger  gross  money 

income 118 

Gains  usually  made  by  employing  class  under  such  conditions  .         .  ng 
Flow  of  real   income   likely  to  respond  to  the  changes  in  money 

income         .         .         .         •         •         •         •         •         .         .         .119 
Wide  divergence  of  these  inquiries  from  the  wages  fund  discussion  .  122 
Conclusion  :  the  wages  fund  discussion  throws  light  only  on  the  ma- 
chinery of  distribution          ........  122 


PART  II. 

CRITICAL   HISTORY   OF   THE   WAGES   FUND 
DISCUSSION. 

CHAPTER   VI. 

BEFORE   ADAM    SMITH. 

The  relation  of  capital  to  wages  hardly  touched  before  Adam  Smith  .  124 

Wages  usually  said  to  depend  on  the  price  of  food  ....  125 
The  silence  of  earlier  writers  on  capital  and  wages  explained  by  their 

excessive  attention  to  international  trade  .....  126 

And  by  the  slight  development  of  the  modern  industrial  organization  .  126 
Turgot  an  exception  to  these  general  statements.  His  remarkable 

discussion  of  capital     .........  127 

Yet  Turgot  did  not  touch  the  dependence  of  wages  of  capital  .  .  128 

CHAPTER   VII. 
ADAM    SMITH. 

General  position  of  the  Wealth  of  Nations  in  the  development  of 

economic  theory 131 

Most  novelty  in  the  treatment  of  production  and  distribution    .         .  132 

How  affected  here  by  earlier  writers 132 


xii  WAGES   AND   CAPITAL. 

PAGE 

The  division  of  labor  the  point  of  departure 134 

Digressions  thence  to  other  topics      .......  136 

The  division  of  labor  recurred  to  when  the  analysis  of  capital 

begins 137 

The  analysis  of  capital  incomplete  .  .  .  .  .  .  .138 

Treatment  of  capital  in  its  relation  to  wages 140 

Dependence  of  laborers  on  masters    .......   141 

Two  sources  of  demand  for  labor  :  "  revenue  "  and  "stock"  .  .  142 
"  Revenue  "  employs  unproductive  laborers  and  leads  to  prodigality  .  143 
"  Stock  "  employs  productive  laborers  ......  144 

Usually  described  as  a  fund  of  money 145 

A  different  view  of  "  stock  "  in  the  second  Book  ....  146 
Fixed  and  circulating  capital,  and  their  relation  to  stock  .  .  .  147 
Finished  goods  not  yet  in  consumer's  hands  described  as  capital  .  147 
But  commodities  for  laborers'  consumption  not  so  described  .  .  148 
Money  and  money  wages  described  as  means  toward  securing  real 

income         ...........  148 

Why  Adam  Smith  did  not  carry  his  reasoning  farther  .  .  .149 
Summary  of  his  position  .  .  .  .  .  .  .  .  .150 


CHAPTER   VIII. 
THE    IMMEDIATE    FOLLOWERS    OF   ADAM    SMITH. 

Discussion  immediately  after  Adam  Smith  turned  chiefly  to  other 

topics  than  wages  and  capital .152 

His  successors  followed  the  Wealth  of  Xations          .         .         .         .   153 

Sismondi,  on  the  need  of  advances  to  laborers 153 

On  the  permanent  causes  affecting  wages 154 

The  same  treatment  in  Sismondi's  later  writings        .         .         .         .    155 

J.  B.  Say  simply  follows  Adam  Smith 156 

Ganilh  13? 

Lauderdale  differed  from  Adam  Smith  on  some  topics        .         .         .158 
But  made  no  advance  on  wages  and  capital         .          .          .         .          .158 

Malthus,  in  the  Essay  on  Population,  professed  to  differ  with  Adam 

Smith  on  the  source  of  the  demand  for  labor       .          .          .          .   159 

But  substantially  added  nothing  .......   161 

Indirectly,  Malthus  greatly  affected  the  course  of  thought,  by  center- 
ing attention  on  the  principle  of  population,  and  causing  neglect 
of  the  proximate  sources  of  wages  .  .  .  .  .  .162 


CONTENTS.  xiii 

CHAPTER    IX. 
RICARDO. 

PACE 

Ricardo's  intellectual  qualities 164 

Little  concerned  with  distribution  as  a  social  question       .         .         .  165 

Hence  his  brief  discussion  of  capital  as  directly  affecting  wages         .  165 

Wages  assumed  to  be  paid  from  capital 166 

All  laborers  assumed  to  be  hired  by  capitalists 166 

The  amount  of  capital  determines  the  market  rate  of  wages       .         .  168 

Capital  resolvable  into  advances  to  laborers        .....  168 
Bearing  of  this  proposition  on  the  theory  of  value      ....  169 

Incidental  mention  of  the  division  of  labor 170 

Profits  depend  on  wages 171 

Bearing  of  these  discussions  on  the  wages  fund  doctrine    .         .         .172 

Mode  in  which  Ricardo  discussed  the  direct  relation  of  capital  to 

wages  ............   172 

"  Circulating  capital  "  and  "  capital"  as  the  source  of  wages      .         .  173 
Explanation  of  Ricardo's  loose  language    .         .         .         .         .         .  174 

The  "  funds  for  the  maintenance  of  labor  "  discussed  in  connection 

with  taxes  on  food        .........  175 

Money  wages  and  commodity  wages  .         .         .         .         .         .         .176 

The  "funds  for   the  maintenance  of  laborers"  are,   in  essentials, 

food 177 

This  source  of  wages  a  predetermined  amount  .         .         .         .         .178 
Something  like  a  rigid  wages  fund  doctrine        .         .         .          .         .178 

General  influence  of  Ricardo's  reasoning 180 

Summary  of  his  position     .........  181 

CHAPTER    X. 
FROM    RICARDO   TO   JOHN    STUART    MILL. 

Influence  of  Ricardo  on  the  writers  of  this  period      ....  183 

James  Mill  begins  by  distinguishing  laborers'  supplies  from  capital  .  184 
But  soon  returns  to  the  traditional  formula         .         .          .          .         .185 

And  uses  this  formula  to  enforce  the  principle  of  population      .         .  iS6 
Mrs.  Marcet's  Conversations  on  Political  Economy     .         .         .         .187 

Their  doctrine  as  to  wages          .          .         .          .         .          .         .          .187 

Shows  Adam  Smith's  influence  rather  than  Ricardo's         .          .          .   188 
M'Culloch  ;  his  general  position         .......   189 

Not  the  author  of  the  wages  fund  doctrine          .....  190 


XIV  WAGES   AND   CAPITAL. 

PAGB 

His  brief  exposition  of  the  relation  of  capital  to  wages      .         .         .  191 

Applies  it  to  the  principle  of  population    ......  192 

M'Culloch's  later  writings 193 

Torrens  questions  for  a  moment  whether  wages  come  from  capital    .  194 

But  accepts  the  current  doctrine 195 

De  Quincey  does  the  same          ........  196 

Senior's  admitted  ability     .........  197 

Begins  by  denying  that  wages  depend  on  the  proportion  between 

capital  and  laborers,  or  between  capital  and  revenue  .         .         .  198 

His  many  digressions          .         .         .         .         .         .         .         .         .  198 

Considers  the  fund  for  maintaining  laborers        .....  199 

Digresses  again 200 

And  finally  becomes  obscure  and  inconclusive   .....  201 

Conclusion  as  to  Senior's  contribution  to  the  wages. fund  discussion  .  202 

Malthus's  later  writings  ;  his  general  opposition  to  Ricardo's  school  .  203 

His  statements  as  to  wages 204 

Mark  no  advance  beyond  current  doctrines  .....  205 
Chalmers,  notwithstanding  some  criticism,  also  retains  the  traditional 

statement     ...........  207 

Richard  Jones  ;  his  general  position  .......  208 

Historically,  most  laborers  have  been  paid  not  from  capital,  but  from 

revenue         ...........   208 

Yet  the  hired  laborers  of  modern  times  are  paid  from  capital     .         .  209 
The  current  doctrine  accepted  as  to  these  .         .         .         .         .         .210 

Looseness  of  all  the  discussions  of  this  period    .         .         .         .         .211 

How  the  wages  fund  was  applied  to  laborers'  combinations  and 

strikes;  by  Torrens  .........  211 

By  M'CuIloch 212 

No  rigid  doctrine        ..........  213 

Explanation  of  the  general  vagueness  of  treatment  during  this 

period  .          .         .          .         .          .         .         .         .         .          .         .213 

Summary  of  the  chapter  .  .  .  .  .  .  .  .  .214 

CHAPTER    XI. 

JOHN    STUART    MILL. 

Mill's  general  position         .         .         .         .         .         .         .         .         .215 

His  statements  on  capital  and  wages  scattered  and  disconnected        .  215 
The  lengthened  period  of  production,  and  the  consequent  depend- 
ence of  labor  on  capital,  never  explicitly  set  forth        .         .         .217 


CONTENTS.  XV 

PAGE 

But  other  related  subjects  treated  at  length 218 

Thus  the  effects  of  luxurious  expenditure  by  the  rich,  and  of  demand 

for  commodities 219 

How  these  discussions  illustrate  Mill's  general  intellectual  tendency  .  220 

Mill's  statement  of  the  wages  fund  doctrine 222 

How  he  qualified  the  usual  statement 222 

But  failed  to  go  further,  and  proceeded  at  once  to  the  principle  of 

population   ...........  223 

The  familiar  formula  thereafter  applied 224 

Some  later  applications 224 

Another  aspect  of  Mill's  exposition :   capital  defined  as  resting  on 

the  owner's  intention  .........  225 

History  of  this  doctrine 225 

In  what  sense  it  can  be  maintained    .......  226 

Failure  to  distinguish  between  the  advance  of  money  wages  by  em- 
ployers, and  the  supply  of  real  wages  from  social  capital     .         .  227 
Incomplete  statement  of  the  relation  of  intention  to  real  capital        .  228 
Common  reference  to  money  funds  as  capital     .....  230 

Confusion  to  which  such  statement  has  led 232 

Mill's  views  on  the  rigidity  of  the  wages  fund 233 

In  general,  no  statement  of  a  rigid  fund     ......  233 

But  some  clear  intimations  to  that  effect    ......  234 

Great  stress  not  to  be  laid  on  such  passages 235 

Summary  of  Mill's  position 236 

His  immediate  followers     .........  236 

Morrison  on  capital  and  labor    ........  236 

On  combinations  and  strikes       ........  237 

Fawcett  follows  Mill 238 

But  does  not  urge  the  wages  fund  against  trade  unions      .         .         .  239 

CHAPTER    XII. 
LONGE — THORNTON — MILL — CAIRNES. 

A  new  burst  of  interest  in  the  wages  fund  followed  the  trade  union 

inquiry  of  1867     ..........  241 

Longe's  pamphlet       ..........  241 

Denies  that  there  is  a  predetermined  wages  fund       ....  242 

Finds  the  real  source  of  wages  in  demand  from  consumers         .          .  243 

Follows  Mill  in  identifying  capital  with  employers'  funds  .         .         .  244 

Hence  denies  rigidity  of  the  wages  fund 244 


xvi  WAGES   AND   CAPITAL. 

PAGE 

MacLeod's  position  similar  to  Longe's 245 

Thornton's  book  On  Labour 246 

Denies  only  the  predetermined  wages  fund 246 

Mill's  surrender  to  Thornton 247 

Mill  and  Thornton  alike  consider  the  employers'  money  funds  .         .  247 
Mill's  easy  surrender  due  to  his  interest  in  the  ethical  aspects  of  the 

question 248 

And  to  the  inadequate  nature  of  his  earlier  statements       .         .         .  249 

The  law  of  demand  and  supply  in  this  controversy    ....  249 

Longe's  objections      ..........  250 

Thornton's  elaborate  criticisms 251 

Mill's  answer  on  this  point          ........  251 

The  wages  fund  doctrine  not  a  case  of  the  general  equation  of  sup- 
ply and  demand 252 

Illustration  from  the  relation  of  quantity  of  money  to  prices      .         .  252 
Doubtful  whether  an  analogy  can  be  drawn  between  the  law  of  de- 
mand and  supply,  as  applying  to  commodities  and  to  general 

wages 254 

Cairnes 256 

Treats  the  wages  fund  as  if  possessed  by  the  immediate  employers    .  256 
And  draws  general  conclusions  on  this  basis       .         .         .         .         .257 

Threefold  division  of  capital       ........  258 

Did  not  answer  directly  the  objections  to  the  rigidity  of  the  wages 

fund 259 

But  considered  the  nature  of  economic  laws,  and  the  effect  of  profits 

on  accumulation  ..........  259 

This  no  answer  to  Thornton's  questions     ......  260 

Cairnes's  discussion  of  trade  unions 261 

Referred   only  to   average  permanent  wages   in    their   relation    to 

profits  ............  262 

This  not  the  essence  of  the  wages  fund  doctrine         ....  262 

Gradual  change  in  the  discussion  of  normal  wages  from  Ricardo  to 

Cairnes        ...........  263 

CHAPTER    XIII. 
THE   WAGES    FUND    IN    GERMANY. 

On   the  Continent,  the  wages  fund  considered  with  care  chiefly  in 

Germany      ...........  266 

Hermann  began  a  breach  with  the  English  doctrine  ....  267 


CONTENTS.  xvii 

PAGE 

Finding  the  real  source  of  .wages  not  in  capital,  but  in  consumers' 

income 268 

Not  clear  as  to  the  relation  of  laborers'  supplies  to  capital  .  .  269 
Weakness  of  the  doctrine  that  consumer's  income  is  the  source  of 

wages 270 

Consumer's  income  affects  only  particular  wages        ....  271 

The  reasoning  runs  in  a  vicious  circle 272 

General  acceptance  of  Hermann's  doctrine  among  the  Germans        .  272 

Brentano  the  next  important  Germnn  writer 274 

Admits  that  wages  come  from  capital,  but  accepts  Hermann's  quali- 
fication        ...........  275 

Examines  Mill's  doctrine  as  to  the  determination  of  capital  by  in- 
tention         ...........  276 

Has  in  mind  employers'  funds 277 

Refers  to  the  possible  swelling  of  those  funds  by  credit      .         .         .  278 

Considers  the  whole  discussion  futile 279 

Inconclusive  treatment  of  the  wages  fund  in  modern  German  books  .  280 

CHAPTER   XIV. 
CONTEMPORARY   DISCUSSION. 

Two  main  trends  of  thought  among  modern  writers  ....  282 
Henry  George  and  Francis  A.  Walker  representatives  of  the  first  .  283 

George's  Progress  and  Poverty 283 

Coexistence  of  high  wages  and  high  profits  said  to  be  inconsistent 

with  wages  fund  doctrine 284 

High  wages  and  high  interest  in  "good  times"  ....  285 

In  what  sense  Ricardo's  doctrine  as  to  high  wages  making  low  profits 

is  sound 286 

Laborers'  wages  said  to  come  from  the  product  of  their  own  labor    .  287 
Reasoning  by  which  this  is  supported         ......  287 

George's  attacks  not  effective  ........  288 

Walker's  position  and  writings 289 

Laborers  employed  not  to  disburse  a  capital,  but  with  a  view  to 

product? 290 

Wages  affected  by  capital  only  by  an  indirect  process  ?      .         .         .  291 
An  illustrative  case  considered   ........  292 

Walker's  reasoning  assumes  the  thing  to  be  proved  :  that  wages 

come  from  product 293 

2 


xviii  WAGES  AND   CAPITAL. 

PAGE 

Wages  said  to  be  sometimes  advanced  'from  capital,  but  to  be  re- 
garded as  paid  from  product        .......  293 

Advance  of  a  year's  subsistence  admitted  to  be  needed      .         .         .  294 
Gradual  shift  from  the  discussion  of  subsistence  to  that  of  salable 

product  and  money  wages 295 

Cases  of  partial  advances  of  wages     .......  296 

Bearing  of  Walker's  wages  theory  on  his  general  theory  of  distribu- 
tion       298 

Wide  acceptance  of  his  views 299 

Course  of  discussion  in  England,  France,  Italy  .....  299 

The  second  trend  of  thought,  in  the  utility  theory  of  value        .         .  300 
Value  as  resting  on  final  utility ;    the  derived  utility  of  inchoate 

goods  ............  300 

First  statement  of  the  new  doctrine  by  Gossen.     Classification  of 

goods  as  having  direct  or  derived  utility 302 

Jevons  also  works  out  the  theory  of  final  utility          ....  303 
And  points  out  the  relation  of  capital  to  the  element  of  time  in  pro- 
duction          304 

Curious  treatment  of  the  wages  fund  doctrine  by  Jevons    .         .         .  306 

Inadequacy  of  his  discussion 307 

Menger  classifies  goods  according  as   enjoyment  is  nearer  or  re- 
moter ............  308 

Time  elapses  in  the  conversion  of  goods  of  lower  order  into  goods  of 

higher 310 

The  extension  of  the  cycle  of  production 310 

Capital,  however,  not  fully  analyzed  by  Menger         .         .         .         .  311 

Bohm-Bawerk  carries  out  this  train  of  thought  most  fully.         .         .  312 
The  relation  of  past  labor  to  present  product,  and  the  function  of 

capital,  fully  analyzed  .........  313 

The  definition  of  capital     .........  314 

The  general  subsistence  fund      .         .         .         .         .         .         .         -314 

Application  to  wages  fund  doctrine  not  fully  worked  out  .         .         .  315 

Clear  merits  of  Bohm-Bawerk's  treatment 316 

Concluding  remarks    .         .         .         .         .         .         .         .         .         •  31? 

CHAPTER   XV. 

GENERAL   SUMMARY. 

Summary  of  the  results  of  Part  I 319 

Summary  of  the  results  of  Part  II 323 


WAGES    AND    CAPITAL. 


PART  I. 
CHAPTER    I. 

PRESENT    WORK    AND    PRESENT    WAGES. 

THE  subject  of  the  present  volume  is  the  wages-fund 
doctrine  and  the  immediate  relation  of  capital  to  wages. 
To  discuss  adequately  this  topic  it  will  not  be  necessary 
to  consider  every  part  of  the  theory  of  wages  or  of  capi- 
tal;  yet  some  parts  of  the  economic  field  will  need  to  be 
traversed  that  may  seem  at  first  sight  to  lie  beyond  the 
limits  chosen.  More  particularly,  it  will  be  necessary  to 
begin  with  some  description  at  large  of  the  process  of  pro- 
duction, and  of  the  manner  in  which  the  exertions  of  men 
yield  them  an  enjoyable  result.  In  the  active  controversy 
on  the  wages-fund  doctrine  which  has  been  going  on  dur- 
ing the  last  quarter  of  a  century,  the  question  has  grad- 
ually come  more  and  more  into  the  foreground  whether 
wages  come  from  the  current  product  of  labor  or  from 
a  past  product.  This  fundamental  question  must  be  dis- 
posed of  before  any  real  advance  toward  the  truth  of  the 
matter  can  be  accomplished. 

In  large  part  we  are  here  on  familiar  ground,  and  might 
pass  over  it  quickly  and  lightly.  Yet  the  question  is  so 
important,  and  its  bearing  on  the  wages-fund  controversy 
so  vital,  that  no  pains  should  be  spared  to  set  it  in  a  clear 
light.  The  inquiry  will  therefore  begin,  in  the  present 

i 


2  WAGES   AND    CAPITAL. 

chapter,  by  considering  with  care  and  in  detail  what  is  the 
relation  between  the  laborer's  immediate  exertions,  the 
laborer's  immediate  product,  and  the  laborer's  immediate 
reward  :  between  the  work  of  to-day,  the  output  of  to-day, 
and  the  pay  of  to-day. 

The  work  of  to-day  and  the  output  of  to-day  go  to- 
gether. Taking  a  survey  of  the  varied  activity  of  a  great 
civilized  community,  let  us  see  what  the  laborers  now  do 
and  what  they  now  produce.  Evidently  the  most  diverse 
things.  Some  laborers  are  at  work  in  mines  digging  out 
ore  and  coal.  Others  are  at  work  conveying  coal  and  ore, 
which  had  been  brought  out  days  or  weeks  before,  to  the 
spot  where  they  are  to  be  used.  Others,  again,  at  that 
spot  are  engaged  in  converting  materials  of  still  earlier 
extraction  into  pig  iron.  Elsewhere,  men  are  at  work 
fashioning  tools  and  machinery  from  iron  and  steel ;  or 
using  the  tools  or  machinery  for  spinning  or  weaving ;  or 
making  up  cloth  into  garments  wherewith  to  protect  us 
from  cold  and  wet,  and  to  satisfy  our  vanity  or  caprice. 
Or,  to  take  another  phase  of  production  :  at  the  moment 
when  some  laborers  are  at  work  digging  out  ore  and 
coal,  and  others  are  transforming  ore  and  coal  of  earlier 
extraction  into  iron,  trees  are  felled  at  one  spot,  timber 
hewn  and  sawed  and  fashioned  at  another  ;  ploughs  are 
made  of  wood  and  iron,  fields  are  tilled,  grain  is  in  pro- 
cess of  transportation  from  granary  to  mill,  other  grain 
is  ground  into  flour,  flour  is  carried  to  the  bakery, — bread, 
finally,  is  baked  and  sold. 

We  naturally  picture  the  various  sorts  of  productive 
effort,  as  they  have  just  been  sketched,  as  taking  place  in 
succession  :  the  ore  is  first  dug,  the  ploughs  then  made, 
the  field  next  tilled,  the  bread  comes  at  the  end.  In  fact, 
looking  at  the  work  and  the  output  of  to-day,  these  oper- 
ations are  all  taking  place  simultaneously.  If  we  follow 
the  history  of  a  loaf  of  bread  or  a  suit  of  clothes,  we  find 


PRESENT   WORK   AND   PRESENT    WAGES.  3 

them  to  be  the  outcome  of  a  succession  of  efforts,  stretch- 
ing back  a  considerable  time  in  the  past.  But  if  we  take 
a  section,  so  to  speak,  of  what  the  world  is  now  doing  and 
now  getting,  we  find  that  at  any  one  moment  all  these 
various  sorts  of  work  are  being  done  together,  and  all  the 
various  forms  of  wealth,  from  ore  to  bread,  are  being 
made  simultaneously. 

It  was  suggested  long  ago  that  production  can  be  best 
described  as  the  creation  of  utilities.  Human  effort  can 
not  add  or  subtract  an  atom  of  the  matter  of  the  universe. 
It  can  only  shift  and  move  matter  so  as  to  make  it  serve 
man's  wants, — make  it  useful,  or  create  utilities  in  it. 
Matter  reaches  the  stage  of  complete  utility  when  it  is 
directly  available  for  satisfying  our  wants;  when  it  is 
bread  that  we  can  eat,  clothes  that  we  can  wear,  houses 
from  which  we  can  secure  shelter  and  enjoyment.  The 
object  of  all  production  is  to  bring  matter  to  this  stage ; 
or,  to  be  more  accurate,  to  yield  utilities,  whether  em- 
bodied in  matter  or  not,  which  give  immediate  satisfac- 
tion. But  a  great  part  of  our  wealth — indeed  much  the 
greater  part  of  it — consists  of  things  which  are  but  partly 
advanced  toward  the  final  satisfaction  of  our  wants. 
Consider  the  enormous  quantities  of  commodities  which 
are  bought  and  sold,  and  which  constitute  huge  items  in 
the  wealth  of  the  community,  in  the  form  of  plant  and 
materials:  coal  and  iron  and  steel,  wool  and  cotton  and 
grain,  factories  and  warehouses,  railways  and  ships,  and 
all  the  infinite  apparatus  of  production  that  exists  in  the 
civilized  countries  of  our  day.  All  this  is  inchoate  wealth. 
It  serves  as  yet  not  to  satisfy  a  single  human  want.  It  is 
not  good  to  eat,  nor  pleasant  to  wear,  nor  agreeable  to 
look  on,  nor  in  any  way  a  direct  source  of  enjoyment; 
unless,  indeed,  we  make  exceptions  of  the  kind  that  prove 
the  rule,  for  the  cases  where  ships  and  railways  are  used 
for  pleasure  journeys,  cotton  soothes  a  burn,  and  grain 


4  WAGES   AND   CAPITAL. 

yields  the  pleasure  of  feeding  a  household  pet.  Virtually, 
all  the  utilities  embodied  in  such  commodities  are  in- 
choate. These  things,  or  others  made  by  their  aid,  will 
in  the  future  bring  enjoyment;  but  for  the  present  they 
satisfy  no  need  and  yield  no  pleasure.  We  are  so  habitu- 
ated to  the  regime  of  exchange  and  sale,  and  to  the  con- 
tinuous disposal  of  these  forms  of  wealth  by  their  own- 
ers for  cash  wherewith  anything  and  everything  can  be 
bought,  that  we  think  of  them  ordinarily  in  terms  of  money 
value,  and  reckon  them  as  equivalent  to  the  possession  of 
so  much  completed  and  enjoyable  wealth.  But,  obviously, 
for  the  community  as  a  whole,  there  is  on  hand  at  any 
given  time  a  great  mass  of  inchoate  wealth  which  as  yet 
can  satisfy  no  want.  And,  at  any  given  time,  a  great 
part  of  the  labor  of  the  community  is  devoted  to  mak- 
ing inchoate  wealth,  of  which  no  part  is  directly  of  use  or 
pleasure  to  any  human  being. 

On  the  other  hand,  part  of  the  labor  of  to-day  is  given 
to  the  close  and  immediate  satisfaction  of  our  wants.  The 
baker  bakes  bread,  the  tailor  makes  clothes.  The  shop- 
keeper sells  us  things  necessary  or  convenient  or  agree- 
able, and  so  brings  them  to  the  point  where  they  finally 
meet  our  desires.  The  servant  waits  on  our  needs  or  con- 
tributes to  our  ease.  In  a  multitude  of  directions  it  is 
the  housewife  through  whom  the  last  stage  toward  satis- 
faction is  reached.  Her  labors  have  been  celebrated  less 
by  economists  than  by  poets;  yet  they  play  a  very  large 
part  in  that  final  activity  through  which  a  long  series  of 
past  efforts  is  at  last  brought  to  fruition. 

Compare  now  for  a  moment  these  two  things  :  on  the 
one  hand,  that  part  of  the  work  of  to-day  which  is  given 
to  inchoate  wealth  or  uncompleted  utilities;  on  the  other 
hand,  that  part  which  serves  directly  to  give  satisfaction. 
Clearly  the  former  is  much  the  larger  in  volume.  It  must 
be  remembered  that  commodities  serve  to  give  real  satis- 


PRESENT   WORK   AND   PRESENT    WAGES.  5 

faction  only  when  they  reach  the  hands  of  those  who 
use  and  enjoy  them.  That  iron  and  stone,  factories  and 
furnaces,  raw  wool  and  cotton,  grain  in  the  bin,  are  not 
available  for  use  or  consumption,  is  obvious  enough.  It 
is  equally  certain,  though  not  so  obvious,  that  flour  and 
cloths  and  boots  are  no  more  available,  when  simply  car- 
ried to  the  stage  of  completion  in  the  mill  or  factory.  To 
reach  the  consumer,  they  must  first  pass  through  the 
hands  of  one  or  two  carriers  and  two  or  three  sets  of  mid- 
dlemen, whose  labors  form  part  of  the  operation  of  pro- 
duction quite  as  much  as  those  of  the  tillers  of  the  soil 
and  the  workers  in  the  factories.  It  is  hardly  worth  while 
to  lay  down  any  hard-and-fast  line  in  matters  of  this 
sort,  or  to  try  to  define  with  precision  where  the  very  last 
step  comes  which  brings  completion  of  the  products,  and 
so  satisfaction  to  the  body  of  consumers.  Ordinarily  this 
stage  would  not  be  reached  until  the  goods  had  been  dis- 
posed of  to  purchasers  by  the  retail  dealer.  While  in  the 
shopkeeper's  hands,  arranged  by  him  and  cared  for  by  him, 
kept  and  stored  in  supply  large  enough  and  varied  enough 
to  meet  regular  and  irregular  demands,  they  are  still  to  be 
considered  as  possessing  only  inchoate  utility.  Under  the 
conditions  of  a  complicated  division  of  labor,  those  work- 
ers whom  in  common  speech  we  call  producers,,  as  dis- 
tinguished from  the  merchants  and  traders,  advance  mat- 
ters a  step  nearer  the  end,  but  usually  bring  nothing  to 
fruition.  The  small  producer  who  deals  directly  with  the 
consumer  has  not  indeed  disappeared  ;  but  in  the  communi- 
ties of  advanced  civilization  the  consumer  satisfies  most 
of  his  wants  by  going  to  a  shop  where  he  finds  commodities 
that  have  left  the  factory  weeks  or  months  before.  The 
stores  of  goods  that  are  accumulated  in  the  warehouses 
of  merchants,  both  of  the  large  dealers  and  the  petty 
tradesmen,  are  still  on  their  way  to  completion,  and  still 
form  part  of  the  great  mass  of  inchoate  wealth.  And,  to 


6  WAGES  AND   CAPITAL. 

repeat,  this  mass  of  inchoate  wealth,  in  any  moment, 
forms  much  the  largest  part  of  the  possessions  of  the 
community. 

It  follows  that  most  of  the  work  which  is  .being  done 
at  a  given  moment  is  work  of  no  immediate  service  to 
any  one.  A  few  laborers  are  engaged  in  putting  the 
finishing  touches  to  commodities  on  which  a  complicated 
series  of  other  laborers  have  been  at  work  for  years, 'or 
even  decades,  in  the  past.  These  few  alone  work  to  supply 
our  immediate  wants.  The  great  mass  of  workers  are  en- 
gaged in  producing  tools,  materials,  railways,  factories, 
goods  finished  but  not  yet  in  the  place  where  the  con- 
sumer can  procure  them — inchoate  wealth  of  all  sorts. 

All  this  is  part  of  the  division  of  labor;  it  is,  in  fact, 
the  most  important  form  of  the  division  of  labor.  While 
a  few  men  put  the  finishing  touches,  the  great  mass  are 
busy  with  preparatory  work  which  is  parcelled  out  among 
them  in  an  infinity  of  trades  and  occupations.  It  is  con- 
ceivable that  some  such  apportionment  of  labor  might 
have  developed  without  a  corresponding  division  of  the 
different  stages  among  different  individuals.  The  same 
man  might  first  mine  the  ore,  then  smelt  it,  then  fashion 
his  tool,  then  use  it,  and  finally  make  his  own  clothing  or 
secure  his  own  food.  But  historically,  the  process  by 
which  so  preponderant  a  part  of  the  labor  going  on  at 
any  one  moment  has  been  devoted  to  preparatory  work 
or  inchoate  wealth,  has  been  accompanied  by  a  corre- 
sponding growth  and  diversification  of  the  division  of 
labor.  It  may  serve  to  make  our  subject  clearer  if  we 
consider  it  for  a  moment  in  this  aspect. 

The  division  of  labor  may  be  classified,  for  the  present 
purpose,  as  of  two  sorts,  contemporaneous  and  succes- 
sive. We  may  designate  as  contemporaneous  that  division 
by  which  one  man  does  all  the  work  of  getting  the  food, 
another  all  that  of  making  the  clothes,  a  third  all  that  of 


PRESENT   WORK   AND   PRESENT    WAGES.  7 

providing  shelter,  and  so  on ;  each  carrying  out  all  the 
steps,  from  beginning  to  end,  involved  in  the  production 
of  his  particular  commodity.  Under  such  an  arrangement 
each  worker  would  become  expert  in  his  trade  and  would 
work  at  it  uninterruptedly.  It  is  conceivable  that  in  a 
primitive  community,  where  all  work  was  devoted  to  secur- 
ing a  finished  commodity  at  short  order,  and  few  steps 
intervened  between  the  beginning  and  the  end  of  produc- 
tion, the  productiveness  of  labor  might  be  considerably 
increased  by  such  a  division  of  it.  But  vastly  more  im- 
portant in  the  history  of  the  arts  and  of  civilization  is  that 
division  which  involves  a  separation  of  successive  related 
acts — the  division  in  which  various  steps  in  production 
are  carried  on,  one  after  another,  by  different  hands,  and 
through  which  each  commodity  becomes  the  product  of  the 
complex  and  combined  labors  of  a  great  number  of  men.* 
A  set  of  porters,  making  a  profession  of  carrying  packs, 
develop  their  muscles  and  wind  to  an  extraordinary  de- 
gree, and  become  capable  of  carrying  those  heavy  bur- 
dens which  astonish  the  traveller  in  backward  countries. 
Yet  their  achievements  are  as  nothing  compared  with 
those  of  the  successive  divisions  of  labor.  When  one  set 
of  men  attend  to  the  making  of  roads,  another  to  the 
rearing  of  horses,  another  to  the  procuring  of  iron  and 
timber,  others  to  wheels,  wagons,  harness, — we  get  in  the 
end,  through  transportation  by  wheeled  vehicles,  an 
enormous  diminution  in  the  labor  required  for  a  given 
result.  The  contrast  is  still  more  striking  if  we  consider 
the  successive  division  of  labor  in  the  last  form  to  which 
the  art  of  transportation  has  been  carried  in  the  present 


*  This  distinction  is  effectively  brought  out  in  Monger's  Grundsatze 
der  Volksivirthschaftslehre,  chapter  i,  §  5.  Compare  what  is  said  below, 
Part  II,  Chapter  XIV,  of  the  services  of  the  Austrian  writers  in  this  part 
of  economic  analysis. 


g  WAGES   AND   CAPITAL. 

century.  The  operations  extending  over  a  series  of  years 
for  cuttings,  embankments,  tunnels,  bridges,  not  to  men- 
tion the  tools  for  these,  which  engaged  the  energies  of  a 
still  earlier  series  of  workers;  the  making  of  iron  and 
steel,  of  engines  and  cars,  of  the  endless  variety  of  rail- 
way apparatus, — all  finally  bring  that  extraordinary 
cheapening  of  transportation  which  has  so  completely 
revolutionized  the  industry  of  modern  times.  To  find 
out  how  much  labor  has  been  given  under  these  meth- 
ods to  any  one  wagon  load  or  any  one  car  load,  we  should 
need  to  consider,  in  due  measure,  all  the  successive  steps. 
We  should  need  to  assign  some  slight  fraction  of  the 
labor  given  to  the  making  of  the  wagon-road  or  roadbed 
of  the  railway  ;  a  fraction,  less  small,  of  the  labor  for 
making  the  wagons,  or  the  cars  and  engines  ;  the  whole  of 
the  labor  of  those,  like  the  drivers  of  the  horses  or  the 
trainmen  of  the  railway,  who  are  engaged  immediately  in 
transportation.  To  carry  out  directly  a  calculation  of  the 
labor  involved  in  the  carriage  of  a  single  ton  or  wagon 
load  would  be  impossible  ;  but  an  infallible  test, — the 
price  at  which  the  service  can  be  rendered, — shows  how 
enormously  more  effective  is  the  more  extended  and  com- 
plicated mode  of  doing  the  work. 

It  would  be  difficult  to  find  an  historical  example  of 
the  bare  and  uncomplicated  use  of  the  contemporaneous 
division  of  labor.  The  earliest  form  doubtless  was  more 
or  less  of  the  successive  sort,  and  the  two  have  developed 
hand  in  hand  with  the  progress  of  the  arts.  The  contrast 
between  the  primitive  porter  and  the  railway  is  obviously 
a  contrast  not  between  the  contemporaneous  and  the  suc- 
cessive division  of  labor,  but  between  two  phases  of  the 
successive  division.  The  transporting  of  goods  means  only 
that  materials  are  carried  to  those  who  are  to  manipulate 
them,  or  tools  to  those  who  are  to  use  them,  or  enjoyable 
goods  to  those  who  are  to  consume  them  or  sell  them  to 


PRESENT   WORK   AND   PRESENT   WAGES.  g 

consumers.  It  means  but  one  step, — sometimes  an  early 
step,  sometimes  a  late  one, — in  the  successive  division  of 
labor.  But  it  illustrates  the  contrast  between  shorter  and 
longer  ways  of  attaining  a  given  end,  and  the  mode  in 
which  the  progress  of  invention  has  caused  a  long  stretch 
of  time  to  elapse  between  the  first  step  and  the  last 
toward  the  satisfaction  of  human  wants. 

So  overpoweringly  great  have  been  the  results  of  the 
successive  division  of  labor,  that  it  is  natural  to  think 
of  its  extension  as  a  cause,  or  at  least  as  a  necessary  inci- 
dent, in  the  increase  of  the  powers  of  mankind  and  the 
abundance  of  enjoyable  goods.  In  a  great  number  of 
striking  cases  we  see  the  progress  of  the  arts  taking  a 
direction  similar  to  that  which  has  just  been  sketched  as 
to  the  art  of  transportation.  The  spinning  wheel  and  the 
hand  loom,  easily  and  simply  made,  have  given  way  to 
the  jenny  and  the  mule  and  the  power  loom,  fixed  in  a 
great  building,  and  moved  by  complicated  machinery ; 
all  involving  a  longer  stage  of  preparatory  effort,  and 
yielding  the  enjoyable  commodity  in  the  end  on  easier 
terms.  Savages  grind  corn  by  rubbing  it  between  two 
heavy  stones  which  nature  happens  to  have  provided  in 
something  like  the  needed  shape.  The  grist  mill,  with  its 
hewn  stones  and  its  simple  machinery,  serving  its  own 
limited  neighborhood,  represents  a  considerable  extension 
in  time  of  the  productive  process,  and  a  great  increase 
in  its  efficiency.  The  modern  steam  mill,  with  its  huge 
plant,  its  warehouses  and  machinery,  with  the  enormous 
apparatus  of  railways  and  steamers  for  bringing  the  grain 
from  the  four  quarters  of  the  globe  and  transporting  the 
flour  to  distant  consumers,  carries  both  consequences 
still  further.  Hence  it  has  been  laid  down  as  a  general 
proposition,  by  one  of  the  ablest  and  most  ingenious 
writers  of  our  own  clay,  that  every  increase  in  the  effi- 
ciency of  labor  brings  with  it  an  extension  in  time  of 


I0  WAGES  AND  CAPITAL. 

the  process  of  production.*  But  it  may  be  questioned 
whether  anything  like  a  connection  of  cause  and  effect 
can  be  traced,  or  anything  more  than  a  fact  of  usual  ex- 
perience found.  In  the  past,  those  inventions  and  discov- 
eries which  have  most  served  to  put  the  powers  of  nature 
at  human  disposal  have  indeed  often  taken  the  form  of 
greater  and  more  elaborate  preparatory  effort.  The  rail- 
way, the  steamship,  the  textile  mill,  the  steel  works,  the 
gas  works  and  electric  plant, — in  all  these,  invention  has 
followed  the  same  general  direction.  But  that  it  will  do 
so  in  the  future,  or  has  always  done  so  in  the  past,  can  by 
no  means  be  laid  down  as  an  unfailing  rule.  The  railway, 
the  telegraph,  and  the  telephone,  have  served  to  shorten 
many  steps  in  production  ;  and  elaborate  machines,  though 
it  takes  time  to  make  them,  do  their  work,  once  made, 
more  quickly  than  simpler  tools.  Invention  in  the  future 
may  dispense  with  steps  now  thought  indispensable;  or  it 
may  enable  elaborate  plants  to  be  dispensed  with,  as  would 
be  the  case  if  the  success  of  flying  machines  made  the  costly 
roadbed  of  the  railway  unnecessary.  It  would  be  rash 
to  say  that  the  productive  process,  under  the  successive 
division  of  labor,  is  likely  to  be  either  lengthened  or  short- 
ened ;  for  the  ferment  in  the  world  of  invention,  and  the 
glimpses  of  new  processes  in  almost  every  direction,  make 
either  outcome  possible.  But  it  is  in  the  highest  degree 


*  Professor  Bohm-Bawerk's  brilliant  analysis,  in  the  opening  chapters 
of  the  Positive  Theory  of  Capital,  has  done  more  than  any  other  single 
discussion  to  emphasize  the  significance  of  the  lengthened  period  of  pro- 
duction. It  is  due  to  this  able  thinker  to  note  that  he  describes  in  these 
chapters  the  connection  between  the  extension  of  production  over  time 
and  its  increasing  efficiency  as  a  simple  fact  of  experience,  not  as  part  of 
the  nature  of  things  ;  but  in  the  corollaries  drawn  from  the  proposition 
in  his  later  reasoning  it  is  treated  as  if  universally  true.  Compare,  how- 
ever, what  he  has  said,  in  reply  to  some  American  critics,  in  the  Quar- 
terly Journal  of  Economics,  for  January,  1896. 


PRESENT    WORK    AND    PRESENT    WAGES.  ir 

improbable  that  any  changes  the  future  may  bring  will 
affect  that  feature  of  the  industrial  situation  which  is  im- 
portant for  the  subject  here  under  discussion.  Under 
any  methods  of  production,  considerable  quantities  of  ma- 
terials will  be  provided  in  advance,  tools  will  be  made 
with  much  labor,  and  consumable  commodities  will  be 
brought  to  completion  at  the  end  of  long  stages  of  pro- 
ductive effort. 

The  beginning  and  the  end  of  the  process  of  produc- 
tion have  been  just  spoken  of;  but  clearly  these  are  lim- 
its more  easily  described  in  general  terms  than  fixed  with 
precision  in  a  particular  case.  The  end  of  the  process  of 
production  is  indeed  not  difficult  to  fix.  It  comes  when 
enjoyment  begins,  when  the  consumer  gets  the  where- 
withal to  feed,  to  clothe,  to  shelter  himself,  to  minister 
to  his  satisfaction  or  pleasure  in  any  way.  Ordinarily 
this  stage  conies,  as  to  tangible  goods,  when  they  pass 
from  the  shelf  of  the  retail  dealer  into  the  hands  of  the 
purchaser.  But  it  is  by  no  means  easy  to  put  the  finger 
on  the  point  where  the  process  of  production  has  its  be- 
ginning. Bread  is  made  from  flour,  and  flour  from  grain ; 
the  sowing  of  the  seed  is  our  starting  point  in  the  pro- 
cess of  production  ;  but  seed  was  grown  a  season  before, 
and  comes  from  an  earlier  stage  of  effort.  The  plough, 
too,  was  provided  before  the  seed  was  sown,  and  that 
plough  was  made  with  tools  which  came  from  still  an 
earlier  application  of  labour.  The  mill  in  which  the  grain 
was  ground  into  flour  was  erected  years  before,  and  the 
railway  which  carried  the  grain  to  the  mill  stands  for 
another  previous  application  of  labour.  Where  shall 
we  say  that  the  process  of  production  begins  ?  If  we 
would  be  mathematically  accurate,  we  should  need  to 
carry  it  ages  back,  to  the  time  when  the  first  tool  was 
made  ;  for  tools  are  made  with  tools,  and  each  is  in  some 
infinitesimal  part  the  result  of  labor  applied  to  its  pre- 


12  WAGES   AND   CAPITAL. 

decessor  of  a  thousand  years  ago.  For  practical  pur- 
poses, to  be  sure,  we  can  in  large  part  dismiss  this  con- 
sideration. The  labor  given  fifty  years  ago  to  smelting 
iron  that  was  made  into  tools,  which  again  served  to 
make  other  tools,  is  so  infinitesimal  a  part  of  the  labor 
involved  in  producing  the  consumable  commodities  of  the 
present,  that  we  may  say,  De  minimis  non  curat  lex.  But 
the  complications  of  the  labor  of  the  present  and  of  the 
immediate  past  are  no  less  puzzling.  The  carpenter 
works  one  day  at  the  frame  of  a  steel  mill,  which  will 
turn  out  steel  beams  to  be  used  in  buildings  or  ships; 
years  may  elapse  before  the  first  completed  commodity 
emerges.  The  next  day  he  makes  a  piece  of  furniture, — 
or,  rather,  does  his  share  in  the  making  of  it, — which  con- 
duces to  the  comfort  of  a  householder  within  a  week.  The 
railway  carries  ore  which  represents  a  very  early  stage  in 
the  process  of  production  ;  it  carries  wool,  which  may  be 
made  into  a  coat  and  may  warm  its  wearer  within  three 
months ;  and  passengers  who  at  the  moment  are  enjoying 
a  pleasure  jaunt.  To  measure  exactly  where  the  labor 
which  builds  and  operates  a  railway  stands  in  the  process 
of  production  is  practically  impossible. 

Hence  it  is  practically  impossible  to  measure  how  long 
the  average  process  of  production  is, — to  say  how  long  an 
interval  has  elapsed  between  the  time  when  all  the  con- 
sumable commodities  now  available  were  begun  and  the 
time  when  they  were  completed.  We  can,  indeed,  conceive 
of  the  meaning  of  such  an  average.  We  can  say  that  the 
labor  of  the  domestic  servant  issues  in  enjoyment  very 
quickly;  that  of  the  operative  in  a  woollen  mill,  after  a 
few  weeks  or  months;  that  of  the  farmer,  after  a  year; 
that  of  the  ship  carpenter  or  steel  worker,  after  years  or 
even  decades.  If  we  could  take  the  balance  of  short 
processes  and  long  processes,  we  should  ascertain  how 
long,  on  the  average,  it  had  taken  to  make  our  present 


PRESENT   WORK   AND    PRESENT    WAGES.  I3 

enjoyable  possessions.  We  can  even  do  more  than  pic- 
ture to  ourselves  this  possible  grouping  and  offsetting  of 
the  various  processes.  We  can  say,  from  general  observa- 
tion, that  the  tendency  of  invention  has  been  to  lengthen 
the  average.  The  process  of  production,  as  a  whole,  has 
probably  tended  to  become  longer ;  and  if  invention  fol- 
lows the  same  lines  in  the  future  as  in  the  past,  the  pro- 
cess, on  the  average,  will  become  still  longer.  But  it  is 
impossible  to  say  how  long  it  now  is,  whether  two  years 
or  five  or  ten.  The  complications  of  the  case  make  any 
statement  in  figures  out  of  the  question.  When  we  con- 
sider the  immediate  history  of  the  most  common  sources 
of  satisfaction, — food,  clothes,  shelter  ;  and  reflect  how 
long  a  time  has  elapsed,  even  after  the  needed  tools 
were  on  hand,  since  the  grain  and  cotton  were  sown,  the 
sheep  raised  for  the  wool,  and  the  cattle  for  the  .leather, 
the  bricks  made,  the  trees  felled, — we  may  be  sure  that 
the  average  period  of  production  must  be  stated  in  terms 
of  years.  And  this  vague  conclusion,  unsatisfactory  as 
it  would  be  for  statistical  purposes,  is  sufficient  for  the 
purpose  now  in  hand.  It  is  clear  that  production  is 
spread  over  a  period  of  years  ;  and  it  is  clear  that  the 
greater  part  of  present  labor  is  given  to  production  at 
stages  preceding  by  a  longer  or  shorter  interval  the  at- 
tainment of  the  enjoyable  result. 

Before  leaving  this  subject  one  further  circumstance 
may  be  noted  in  regard  to  the  length  of  time  over  which, 
under  the  modern  division  of  labor,  the  operations  of 
production  extend.  One  part  of  the  period,  the  last  of 
all,  is  perhaps  susceptible  of  measurement.  To  repeat 
what  has  already  been  said,  the  work  of  the  merchant  and 
trader  is  as  fully  productive  as  that  of  the  artisan  and  car- 
rier. Each  does  his  share  toward  bringing  commodities  to 
the  stage  where  enjoyment  finally  begins.  It  would  doubt- 
less be  possible  to  ascertain  how  long  the  last  stage  en- 


!4  WAGES   AND    CAPITAL. 

dures  ;  to  find  how  long  a  period  elapses,  on  the  average, 
between  the  moment  when  goods  pass  from  the  hands  of 
the  manufacturer  and  artisan  into  the  hands  of  the  dealer, 
and  that  at  which  they  pass  from  the  last  dealer  into  the 
hands  of  the  consumer.  The  great  mass  of  commodities 
pass  through  the  hands  of  two  or  three  middlemen  ;  they 
go  first  to  the  wholesale  dealer  or  agent,  then  to  the  job- 
ber, finally  to  the  retailer.  Each  of  these  keeps  them 
a  space.  Barring  perishable  commodities,  like  meats  and 
vegetables,  a  turn-over  of  more  than  six  or  eight  times  in 
the  year  is  unusual ;  as  to  many  articles,  one  of  three  or 
four  times  a  year  is  common.  The  inference  is  plain. 
Months  elapse,  on  the  average,  between  the  time  when 
goods  are  finished,  in  the  everyday  sense  of  the  word,  and 
the  time  when  they  reach  that  stage  of  enjoyment  which  is 
the  real  aim  and  end  of  all  effort. 

So  much  as  to  the  first  part  of  the  inquiry  undertaken 
in  the  present  chapter, — the  relation  between  the  work  of 
to-day  and  the  output  of  to-day  ;  an  inquiry  which  has 
proved  to  involve  some  consideration  of  the  work  of  yes- 
terday as  well.  Whether  as  to  the  work  now  being  done, 
or  the  work  which  yields  the  consumable  goods  now  avail- 
able, we  have  the  same  result.  The  work  of  to-day  is  ap- 
plied preponderantly  to  inchoate  wealth,  to  preparatory 
stages  in  production  ;  and  the  output  of  to-day  consists 
mainly  of  goods  not  yet  in  enjoyable  form.  Most  of  the 
labor  being  done  at  the  present  moment  will  bring  con- 
sumable goods  at  some  time  in  the  future;  while  the  con- 
sumable goods  now  available  are  mainly  the  product  of 
past  labor.  The  whole  process  of  production  is  extended 
over  a  period  not,  indeed,  to  be  measured  with  accuracy, 
yet  certainly  to  be  stated  in  terms  of  years. 

We  may  turn  now  to  the  second  part  of  the  inquiry: 
what  is  the  pay  of  to-day  ? 

The  answer  here  is  simple,  and  could  be  given  in  the 


PRESENT   WORK   AND   PRESENT   WAGES.  jj 

briefest  terms.  The  immediate  reward  for  the  exertion  of 
labor  consists  of  completed  and  enjoyable  commodities. 
Food,  clothing,  shelter,  things  that  satisfy  our  needs  and 
our  desires, — these  aie  the  pay  of  to-day.  The  laborer's 
bread  and  meat,  his  tobacco  and  his  whiskey,  his  house 
and  his  clothes,  things  that  may  do  him  good  or  harm,  but 
are  at  all  events  desired  by  him,  constitute  the  reward  he 
now  gets. 

This  is  so  simple  that  it  would  seem  not  to  need  an- 
other word  of  explanation.  Yet  on  the  subject  of  wages, 
as  on  many  others  in  economics,  it  is  the  failure  to  bear 
in  mind  very  simple  and  obvious  facts  that  most  fre- 
quently causes  error.  In  discussions  of  wages,  of  the 
source  whence  they  are  paid  and  the  factors  that  affect 
their  amount,  nothing  has  been  more  common  than  to 
consider  only  the  machinery  by  which  laborers  are  en- 
abled to  get  their  real  wages.  The  cash  paid  them  by  an 
employer,  or  received  by  them  in  direct  pay  for  their 
product,  has  been  mainly  thought  of.  The  obvious  dis- 
tinction between  real  wages  and  money  wages  makes  its 
appearance  in  every  book  on  the  elements  of  economics, 
but  it  is  too  often  forgotten  when  the  causes  determining 
wages  come  to  be  examined.  When  a  question  arises  as 
to  the  relation  between  the  laborer's  output  and  his  pay, 
it  is  common  to  speak  of  his  product  and  of  his  pay  in 
terms  of  money.  When  it  is  asked  whether  the  laborer 
is  paid  out  of  capital  or  out  of  product,  the  first  impulse 
is  to  think  of  capital  as  money  funds  in  the  hands  of  the 
employer  and  of  product  as  the  money  value  of  what  is 
being  turned  out.  In  answer  to  the  proposition,  attributed 
more  or  less  justly  to  the  older  English  economists,  that 
laborers  get  their  wages  from  a  rigidly  predetermined 
source,  it  is  often  said  that  the  wages  which  employers 
can  pay  may  be  increased  by  quicker  sales  or  by  the  use 
of  credit, — which  obviously  refers  to  money  wages.  The 
3 


1 6  WAGES   AND   CAPITAL. 

inquiry  as  to  the  direct  relation  between  laborers  and 
employers,  and  as  to  that  first  step  in  the  apportionment 
of  wages  which  comes  through  money  payments  from  one 
to  the  other,  is  important  and  fruitful,  as  will  elsewhere 
appear.  But  on  the  crucial  question  of  the  cause  of  gen- 
eral high  wages  in  the  sense  of  general  real  prosperity 
among  laborers,  it  leads  only  to  confusion.  If  we  would 
learn  what  makes  wages  high,  in  the  sense  which  is  mainly 
important  for  the  workmen  as  a  class  and  for  the  commu- 
nity as  a  whole,  we  must  bear  in  mind  that  real  wages 
alone  are  to  be  thought  of, — things  consumable  and  enjoy- 
able. 

What  is  true  of  the  laborers  is  true  of  all  classes  in 
the  community.  All,  whether  idlers  or  workers,  get  their 
real  reward  from  the  same  source — the  completed  com- 
modities which  satisfy  human  wants.  These,  as  they  ap- 
pear in  recurrent  supply,  form  the  net  income  of  the  com- 
munity. Whether  there  can  be  any  possibility  of  separation 
of  this  net  income  into  parts  destined  for  any  one  set  of 
persons,  or  appropriated  to  them  ;  whether  one  part  of  the 
available  supply  can  be  said  to  constitute  a  wages  fund, 
another  a  profit  fund,  a  third  an  interest  fund,  a  fourth  a 
rent  fund, — these  are  questions  that  will  engage  our  atten- 
tion at  a  later  stage.  Here  we  may  content  ourselves 
with  the  simple  and  unquestionable  proposition,  that  all 
real  income  of  any  sort  comes  in  the  form  not  of  money, 
but  of  goods  and  wares  that  minister  to  our  wants. 

Still  further  to  emphasize  this  elementary  yet  all-im- 
portant proposition,  we  may  consider  for  a  moment  where 
we  should  find,  in  any  given  co'mmunity,  this  immediate 
reward  of  the  laborer.  It  must  proceed  chiefly  from  the 
stocks  in  the  hands  of  the  retail  dealers.  Their  wares  are 
in  the  last  stage  which  production  goes  through,  and  are 
on  the  point  of  ripening  into  full  completion.  A  good 
part  of  wages,  no  doubt,  must  come  from  elsewhere. 


PRESENT   WORK   AND   PRESENT    WAGES.  \j 

House  shelter,  partly  a  necessity  and  partly  a  source  of 
comfort  and  luxury,  is  ordinarily  already  on  hand,  need- 
ing no  further  labor  toward  complete  fruition  than  oc- 
casional repairs.  If  owned  by  another  person,  as  is  com- 
monly the  case  with  the  house  occupied  by  the  hired 
laborer,  that  person  is  in  possession  of  the  source  whence 
so  much  of  real  wages  is  derived.  If  the  laborer  owns 
his  own  house,  he  spends  the  money  received  for  present 
labor  in  other  ways.  The  shelter  and  comforts  of  the 
house  he  owns  form  no  part  of  his  real  reward  for  the 
work  of  to-day  ;  they  are  the  reward  of  past  labor,  or 
past  claims  or  rights  of  some  sort,  and  no  more  form  part 
of  his  pay  for  present  work  than  the  enjoyments  which  the 
idle  rich  buy  with  their  money  incomes  form  reward  for 
any  present  exertion.  His  wages  for  present  exertion  are 
what  he  buys  with  the  cash  which,  under  a  money  regime, 
he  receives  for  the  day's  or  week's  work  ;  and  questions  as 
to  the  sources  of  his  real  wages,  their  limits,  their  flexi- 
bility or  predetermination,  are  questions  as  to  limits  and 
determinateness  of  the  stocks  or  forthcoming  supplies  of 
goods  now  chiefly  in  the  hands  of  shopkeepers,  which  he 
will  buy  with  his  money  wages. 

We  are  now  in  a  position  to  give  an  answer  to  one 
part  of  the  question  with  which  this  chapter  opened : 
whether  wages  are  or  are  not  paid  from  present  or  cur- 
rent product.  The  answer  to  the  other  part  of  the  ques- 
tion,— whether  or  not  they  are  paid  from  capital, — must 
still  be  postponed,  requiring,  as  it  does,  some  further  con- 
sideration of  the  definition  and  function  of  capital.  But 
wages  are  certainly  not  paid  from  the  product  of  present 
labor;  they  are  paid  from  the  product  of  past  labor. 
Present  labor  produces  chiefly  unfinished  things  ;  but  the 
reward  of  present  labor  is  finished  things.  Real  wages 
are,  virtually  to  their  full  extent,  the  product  of  past  labor. 
At  this  moment,  or  within  -a  few  days,  the  last  touches 


18  WAGES   AND   CAPITAL. 

toward  completion  have  indeed  been  given  to  the  com- 
modities now  being  enjoyed.  But  the  great  bulk  of  the 
labor  whose  product  all  of  us,  whether  laborers  or  idlers, 
now  enjoy,  was  done  in  the  past. 

This  fact  is  obscured,  in  our  everyday  thought,  in  two 
ways:  we  think  of  the  product  in  terms  of  money,  and 
we  think  of  the  laborer  who  gives  the  finishing  touches 
in  production  as  the  "  maker  "  of  the  article.  When  we 
want  to  compare  the  amount  which  a  laborer  produces 
with  the  amount  which  he  receives,  the  simplest  and  most 
obvious  way  is  to  compare  the  money  value  of  the  two  :  a 
method  the  more  tempting  because  for  many  purposes, 
not  least  for  the  business  ends  of  the  individual  employer, 
it  is  all-sufficient.  Thus  we  think  of  product  and  wages 
as  similar  things,  and  of  product  as  preceding  wages ; 
forgetting  that  in  concrete  reality  they  are  different  things, 
and  that  present  real  wages  must  be  on  hand  long  before 
present  product  is  completed.  On  the  other  hand,  the 
baker  is  said  to  make  bread,  the  tailor  to  make  clothes, 
the  carpenter  to  make  furniture;  though,  with  the  incon- 
sistency characteristic  of  that  early  stage  of  classification 
which  is  crystallized  in  common  speech,  we  never  speak 
of  the  merchant  or  shopkeeper  as  "making"  anything. 
In  fact,  the  baker  and  the  tailor  do  no  more  than  their 
small  shares  in  the  making  of  bread  and  clothes;  a  long 
series  of  farmers  and  wool-growers,  manufacturers,  mer- 
chants, and  carriers  constitute  with  them  the  complete 
chain  of  the  producers  of  the  articles. 

There  is  a  sense,  it  is  true,  in  which  we  may  speak 
with  accuracy  of  wages  as  coming  from  current  product; 
and  it  is  one  which  deserves  attention,  because  it  brings 
out  the  relation  between  some  older  speculations  on 
wages  and  capital  and  the  more  recent  turn  of  the  dis- 
cussion. 

The  classic  economists  were  in  the  habit  of  speaking 


PRESENT  WORK   AND   PRESENT  WAGES.  19 

of  the  commodities  consumed  by  laborers  as  a  fund  or 
stock,  described  in  a  way  that  implied  a  great  store  on 
hand,  ready  and  available  at  once,  likely  to  be  replaced 
after  a  season  by  another  similar  store.  This,  at  least,  was 
their  practice  when  they  described  the  wages  fund  as  a 
concrete  thing,  made  up  of  commodities  which  would 
yield  real  wages.  Too  often  they  spoke  and  thought  of 
funds  and  capital  in  the  money  sense,  and  of  wages  as 
coming  from  the  employing  capitalists'  money  means, 
thereby  introducing  a  confusion  which  runs  through  al- 
most the  whole  of  the  century's  literature  on  the  subject. 
Ricardo,  however,  and  the  abler  of  Ricardo's  followers, 
usually  kept  to  the  first  conception,  of  a  wages  fund  made 
up  of  commodities,  not  of  money.  In  the  Ricardian  sys- 
tem, again,  wages  were  measured  in  terms  of  food,  and 
especially  of  grain  or  corn  ;  and  the  wages  fund  consisted 
of  a  stock  of  food.  For  shortness  of  reasoning  and  of 
statement  (too  often  with  the  result  of  confusion  in  both) 
this  stock  was  reasoned  about  as  if  it  were  owned  by  the 
immediate  employers  and  handed  over  by  them  directly 
to  laborers  who  ate  it.  The  miller  and  the  baker  were 
put  aside  ;  and,  what  was  more  dangerous  to  accurate 
thought,  it  was  assumed  for  brevity  that  the  capitalists 
who  employed  the  laborers  were  the  individuals  who  owned 
the  grain.  The  source  of  wages  was  then  easily  conceived 
as  a  fund  stored  up,  all  ready  for  use,  controlled  by  em- 
ployers, limited  in  amount  for  the  time  being,  and  entirely 
the  product  of  past  labor.  The  seasonal  harvesting  of 
the  crops  made  it  impossible  this  year  to  procure  more 
than  had  been  sown  and  harvested  ;  and  the  real  wages 
fund  had  nothing  to  do  with  current  work  and  product. 

The  error  of  this  view  is  one  of  degree  rather  than  of 
kind,  of  insufficiency  rather  than  of  inaccuracy.  It  is 
no  grievous  departure  from  literal  truth  if  we  speak  of 
grain  as  consumable  by  laborers,  omitting  for  brevity, 


2Q  WAGES   AND   CAPITAL. 

the  operations  of  transporting  and  grinding  and  baking  it. 
And  we  may  perhaps  fairly  think  of  the  grain  on  hand 
this  season  as  fixed  in  amount,  incapable  of  being  in- 
creased or  diminished.  Doubtless  there  are  here  some 
elastic  limits  :  a  heavy  crop  may  be  carried  over  in  part 
to  another  season,  and  a  lean  one  consumed  at  once  to 
the  last  bushel  in  anticipation  of  better  times  soon  to 
come.  This  sort  of  averaging  of  the  yield  certainly  could 
take  place  under  modern  methods  of  storage  and  preser- 
vation, and  may  have  taken  place  even  in  the  days  when 
Ricardo  wrote.  It  is  more  important  to  correct  the  older 
view  in  other  directions.  Food  is  not  the  only  article 
consumed  by  laborers;  none  of  the  various  commodities 
that  make  real  wages,  not  even  breadstuffs,  exist  in  the 
shape  of  accumulated  stores  of  finished  goods.  Further, 
the  capitalists  who  directly  employ  laborers  have  usually 
no  ownership  of  the  commodities  which  make  real  wages. 
If  these  real  wages  come  from  capital,  the  capital  is  cer- 
tainly not  in  the  hands  of  the  employers. 

Considering  both  of  the  last-mentioned  facts  in  the  situ- 
ation,— the  variety  of  the  commodities  which  go  to  make 
real  wages,  and  the  widely  distributed  ownership  of  these 
tangible  commodities, — we  reach  the  conception  of  a  flow 
rather  than  a  fund  of  real  wages.  The  community  pos- 
sesses at  any  given  moment  a  quantity  of  goods  in  all 
stages  of  completion  :  some  just  begun,  some  half  finished, 
some  very  nearly  or  quite  finished.  The  last  touches  are 
being  given  at  every  moment ;  enjoyable  commodities  each 
day  are  consumed,  new  commodities  advance  each  day  to 
take  their  place.  We  have  no  great  stores  of  completely 
finished  goods,  but,  as  Professor  Marshall  has  happily  said, 
a  steady  flow  of  accruing  real  income. 

No  doubt  the  old  conception  of  a  fund  fits  the  facts  of 
the  case  in  some  regards  quite  as  accurately  as  the  new 
one  of  a  flow.  The  distinguished  Austrian  writer  who  has 


PRESENT    WORK   AND    PRESENT   WAGES.  2I 

contributed  so  much  to  the  clearer  understanding  of  this 
part  of  the  machinery  of  production,  has  suggested  that 
all  the  possessions  of  the  community  may  be  reduced  to 
an  equivalent  in  terms  of  subsistence  or  other  finished 
goods.  What  he  calls  the  general  subsistence  fund  is 
made  up  of  all  wealth  whatsoever, — machines,  materials, 
completed  goods.  Its  volume  may  be  measured  by  ascer- 
taining how  much  labor  is  embodied  in  this  sum  total  of 
wealth,  and  how  long  the  wealth,  completed  and  enjoy- 
able, which  so  much  labor  could  produce^would  continue 
to  satisfy  the  wants  of  the  community  at  its  habitual  rate 
of  consumption.  In  this  sense  we  may  say  that  the  com- 
munity owns  at  any  given  time  a  subsistence  fund  for,  say, 
five  years;  meaning  not  that  there  are  stores  of  finished 
goods  which  will  last  five  years,  but  that  the  wealth  on 
hand  has  embodied  in  it  five  years  of  the  community's 
labor,  and,  simply  carried  to  completion  without  the  ini- 
tiation of  a  stroke  of  new  work,  would  last  for  a  long 
period.*  Here  we  have  a  statement  of  the  case,  useful  for 
some  purposes,  which  looks  to  a  fund  rather  than  to  a 
flow.  And  from  still  another  point  of  view  the  conception 
of  a  fund  has  its  justification.  The  stock  of  available  fin- 
ished commodities,  if  a  flow,  is  affected  in  its  volume  by 
sources  which  possess  some  of  the  characteristics  of  a 
reservoir  or  fund.  The  number  of  loaves  that  can  be  put 
forth  from  day  to  day  depends  on  the  season's  stock  of 
grain  ;  that  of  clothes,  on  the  wool  and  the  sheep  on  hand, 

*  As  to  the  relation  between  the  amount  of  the  subsistence  fund, 
measured  by  the  quantity  of  labor  embodied  in  it,  and  the  number  of 
years  over  which  it  may  enable  production  on  the  average  to  be  spread, 
see  the  Positive  Theory  of  Capital,  book  vi,  chapter  v,  and  the  appendix 
at  the  close  of  that  volume.  The  refinements  of  this  calculation,  how- 
ever, are  not  likely  to  lead  to  results  useful  for  the  explanation  of  con- 
crete phenomena,  and  at  all  events  are  not  important  for  the  purposes  of 
the  discussion  in  the  text. 


22  WAGES   AND   CAPITAL. 

and  on  the  machinery  available  for  manipulating  the  ma- 
terials; that  of  boots,  on  the  hides  and  the  cattle  and  the 
available  machinery.  How  far  the  volume  of  consumable 
goods  now  obtainable  is  limited  by  such  conditions ;  how 
far  determined  once  for  all  by  the  materials  and  tools  of 
past  making;  how  far  capable  of  enlargement  or  diminu- 
tion by  changes  in  the  labor  of  the  moment, — these  are 
questions  which  may  engage  our  attention  at  a  later  stage. 
For  the  present  it  is  necessary  only  to  get  a  clear  con- 
ception of  the  sense  in  which  there  is  on  hand  at  any  given 
time  a  supply  or  stock  of  finished  goods  for  the  consump- 
tion of  laborers  and  others.  It  is  a  flow  of  finished  goods 
from  goods  partly  finished,  constantly  wasting  away  and 
constantly  renewed  ;  greatly  affected,  perhaps  determined 
once  for  all,  by  the  mode  in  which  past  labor  has  been 
given  to  tools  and  materials;  yet  certainly  not  without 
some  degree  of  flexibility  at  any  given  moment,  and  cer- 
tainly not  an  accumulated  or  rigid  fund. 

We  can  see  now  in  what  sense  it  is  true  that  wages, — or 
any  other  form  of  income,  for  that  matter, — are  paid  out 
of  current  product.  The  goods  which  laborers  get,  or, 
to  be  literally  accurate,  the  goods  which  they  buy  with 
their  money  wages,  in  a  sense  are  made  from  day  to  day; 
they  are  current  product  in  the  sense  that  the  last  touches 
are  given  them  from  day  to  day.  Something  of  this  sort 
has  doubtless  been  in  the  minds  of  the  writers  who  have 
maintained  that  wages  are  derived  from  present  or  cur- 
rent product.  Unquestionably  a  confusion  between  real 
wages  and  money  wages  has  also  had  its  share  in  the 
adoption  of  their  view.  Current  money  wages  obviously 
do  come  largely  from  the  money  value  of  the  present 
product,  and  the  proposition  that  wages  arc  paid  from 
the  current  yield  of  industry  in  this  sense  is  as  undeniable 
as  it  is  immaterial  so  far  as  the  source  of  real  wages  is 
concerned. 


PRESENT   WORK   AND    PRESENT    WAGES.  23 

We  may  now  summarize  the  results  of  this  chapter  by 
a  graphic  representation  of  the  course  of  production  and 
enjoyment  in  a  modern  community.  A  diagram  showing 
the  relation  between  the  work  of  to-day,  the  output  of 
to-day,  and  the  pay  of  to-day  may  be  constructed  thus : 
let  A  represent  the  workers  who  stand  in  the  earliest  stage 
of  production,  say  the  miners  and  lumbermen  ;  let  B  rep- 
resent those  in  the  next  stage,  say  the  makers  of  pig  iron 
and  of  sawed  timber;  let  C  designate  those  who  carry  on 
operations  in  the  next  stage  toward  completion  ;  D,  those 
in  the  next ;  and  E,  finally,  those  who  give  the  finishing 
touches  and  bring  to  market  a  consumable  commodity. 
The  same  letters  may  indicate  the  products  turned  out  by 
the  different  producers,  A  standing  for  the  iron  ore,  and 
E  for  the  bread  and  meat.  A,  B,  C,  D,  E  may  represent 
the  workers  and  their  output  in  a  first  year ;  A,,  BM  C,,  in 
a  second  year  ;  and  so  on.  We  could  then  array  the  oper- 
ations of  a  series  of  years  in  this  fashion  : 

In  1890 A         B         C         D         E 

«   1891 A/\B,        C,        D,        E, 

"   1892 A, 

"   1893 

"  1894 A, 

In  each  year  all  the  various  operations  are  going  on 
simultaneously.  A,  B,  C,  D,  E  are  at  work  on  their  sepa- 
rate tasks,  and  are  turning  out  all  shades  of  products, 
from  the  crudest  material  to  the  ripened  commodity.  In 
successive  years  the  A's  and  the  E's  continue  alike  to  re- 
peat their  work  :  the  miners  remain  in  the  mine,  the  shop- 
keepers serve  their  customers  in  the  shops.  In  any  one 


24  WAGES   AND   CAPITAL. 

year  the  community,  while  producing  all  the  products  A, 
B,  C,  D,  E,  has  at  its  disposal  only  the  commodities  E. 
These  alone  are  consumable  and  enjoyable;  these  alone 
can  constitute  real  wages  or  real  profits  or  real  income  of 
any  sort.  In  the  year  1890  E  would  be  available;  in  1892, 
E2.  The  question  whether  wages  in  1894,  which  must 
come  out  of  E4,  are  the  product  from  past  or  present  labor, 
can  be  answered  by  inquiring  what  labor  produces  the  E 
commodities  of  any  one  year;  say  E4  of  1894.  If  we  sup- 
pose present  labor,  then  E4  will  be  the  product  of  the  work 
indicated  by  the  horizontal  line  A4,  B4,  C4,  D4,  E4.  If  past 
labor,  or  chiefly  past  labor,  then  E4  will  be  the  product  of 
the  work  indicated  by  the  diagonal  line  A,  Bn  C2,  D3,  E4.  It 
needs  no  argument  to  show  that  the  workers  E4  can  not 
be  completing  the  material  which  A4  are  bringing  forth  at 
the  same  time.  Each  stage  in  the  successive  division  of 
labor  requires  time.  E4  must  be  at  work  on  products 
which  came  from  D  of  an  earlier  period,  say  the  D3  of 
1893';  D3  got  them,  partly  advanced  toward  completion, 
from  C2  of  1892  ;  the  first  steps  were  taken  five  years  ago 
by  A  of  1890.  The  diagonal  line  marks  the  labor  which 
yields  the  enjoyable  commodities  of  1895 — labor  mainly 
of  the  past,  and  only  in  small  part  of  the  present. 

It  hardly  needs  to  be  explained  again  that  a  simple 
scheme  of  this  sort  is  far  from  corresponding  to  the  com- 
plexities of  real  life.  The  earliest  and  the  latest  stages 
of  production  are  so  interwoven  that  any  brief  statement 
or  simple  diagram  can  give  no  more  than  a  crude  and  in- 
accurate picture.  The  commodities  which  we  have  typi- 
fied in  the  E's,  and  which  are  represented  as  lately  finished, 
after  having  gone  through  a  regular  series  of  previous 
operations,  are  sometimes  made  very  largely  with  recent 
labor,  sometimes  very  largely  with  past  labor.  Personal 
or  domestic  service  is  an  important  source  of  enjoyment; 
as  productive  of  satisfaction,  and  therefore  of  wealth 


PRESENT   WORK   AND   PRESENT   WAGES.  25 

in  the  important  sense,  as  the  labor  that  makes  bread 
and  wine.  Here  exertion  and  satisfaction  are  coincident ; 
there  is  no  chain  of  successive  producers.  On  the  other 
hand,  the  shelter  and  comfort  which  are  now  yielded  by  a 
dwelling  are  in  greatly,  preponderant  proportion  due  to 
labor  exerted  in  varying  stages  of  progression  in  the 
past.  And  at  the  other  end  of  the  scale,  commodities  in 
the  early  stages  of  unripeness  may  reach  fruition  by  a 
longer  or  shorter  route.  Pig  iron  may  be  made  into  a 
stove  and  may  serve  to  diffuse  grateful  warmth  within  a 
month ;  or  it  may  be  made  into  a  machine  which  will  be 
used  in  making  another  machine,  and  may  not  issue  in  a 
cosumable  commodity  for  years.  Any  scheme,  or  diagram, 
or  classification  of  the  stages  in  production  must  have  a 
rigid  and  arbitrary  character,  and  can  not  conform  to  the 
endless  complexities  of  the  living  industrial  world.  None 
the  less,  it  may  bring  into  distinct  relief  the  general  truth 
which  underlies  all  the  variety  of  detail, — that  production 
proceeds  by  successive  stages,  and  that  the  community  at 
present  is  supplied  with  necessaries  and  comforts  made 
mainly  by  the  labor  of  the  past. 


CHAPTER   II. 

CAPITAL    AND    WAGES. 

THE  fact  that  present  labor  gets  its  substantial  re- 
ward from  a  product  made  chiefly  by  past  labor  was  the 
basis  of  the  reasoning  of  the  classic  economists.  The 
products  of  the  past  which  served  to  support  and  remu- 
nerate laborers  they  called  capital.  They  inferred — in- 
deed, assumed  as  a  thing  so  obvious  as  hardly  to  need  in- 
ference— that  wages  were  paid  from  capital.  In  the  second 
part  of  the  present  volume  we  shall  have  occasion  to 
note  how  briefly  and  inadequately  they  presented  this 
cardinal  proposition.  Here  we  shall  proceed  at  once 
to  consider  how  far  it  is  sound  ;  how  far  the  products 
of  the  past  are  to  be  called  capital,  and  how  far  the 
proposition  that  labor  gets  its  reward  from  past  prod- 
uct is  equivalent  to  the  proposition  that  wages  are  paid 
from  capital. 

The  question  of  phraseology  and  definition,  which  we 
are  thus  compelled  to  face,  is  from  one  point  of  view 
indifferent,  from  another  very  material.  From  the  first 
point  of  view  any  definition  can  be  made  to  serve,  pro- 
vided it  is  used  consistently.  The  term  capital  can  be 
used  in  any  desired  sense,  if  only  it  be  always  remem- 
bered precisely  what  it  is  to  connote.  Thus  a  writer 
may  freely  use  the  term  capital  in  a  sense  different  from 
that  of  the  older  economists ;  only,  if  thereupon  he  should 
deny  that  wages  are  paid  from  capital,  he  would  not 

26 


CAPITAL   AND   WAGES.  2/ 

squarely  meet  the  question  presented  in  the  traditional 
theorem.*  Yet — and  here  is  the  other  point  of  view — 
something  more  than  simple  consistency  is  involved  in  the 
choice  of  phraseology.  The  object  of  definition  and  of 
classification  is  not  fully  achieved  if  we  fail  to  group  to- 
gether under  one  head  things  that  are  alike,  and  to  distin- 
guish by  different  terms  things  that  are  unlike.  One  sort 
of  labor,  for  example,  may  be  designated  as  productive, 
and  another  sort  as  unproductive;  the  distinction  has  its 
solid  justification  only  if  it  appears  in  due  course  that 
some  propositions  hold  good  of  the  one  sort  which  do  not 
hold  good  of  the  other.  The  difficulty  with  the  much-dis- 
puted terminology  which  Adam  Smith  and  his  successors 
adopted  in  their  use  of  the  phrase  "productive  labor" 
was  of  precisely  this  sort ;  it  did  not  and  could  not  point 
to  substantial  differences  in  regard  to  that  satisfaction  of 
human  wants  which  is  the  object  of  all  labor.  And,  to 
come  closer  to  the  present  subject,  one  form  of  wealth 
may  be  called  capital  while  another  may  be  called  non- 
capital; no  logical  difficulty  will  result  if  the  terms  are 
always  used  in  the  same  sense.  But  the  object  in  view, — 
an  understanding  of  the  phenomena  of  wealth, — will  not 
be  effectually  achieved  unless  we  succeed  in  grouping 
under  each  term  things  that  are  alike,  and  as  to  which  the 
same  propositions  hold  good. 

The  mode  in  which  these  simple  general  principles 
bear  on  the  subject  in  hand  can  be  best  illustrated  by 
sketching  the  historical  development  of  the  conception  of 

*  A  neat  example  of  this  sort  of  procedure  is  furnished  by  Mr.  Henry 
George  in  Progress  and  Poverty,  who  gives  a  meaning  of  his  own  to  capi- 
tal, and  then  denies  with  vigor  that  wages  are  paid  from  capital.  The 
fact  that  his  own  definition  of  capital,  when  carefully  considered,  is  not 
so  different  as  it  purports  to  be  from  the  traditional  one,  does  not  redeem 
the  operation.  Compare  what  is  said  below  of  George's  position  in  the 
wages  controversy  (Part  II,  Chapter  XIV). 


28  WAGES   AND   CAPITAL. 

capital.  Adam  Smith,  with  whom  the  whole  modern  dis- 
cussion begins,  defined  it  as  the  wealth  which  yielded  a 
revenue  to  its  owner.  This  definition  had  a  vogue  for  a 
while,  and  has  not  been  without  its  adherents  in  our  own 
time;  and  for  some  purposes  it  may  still  be  used  with 
advantage.  To  the  individual,  capital  is  that  which  he 
uses  not  for  the  immediate  satisfaction  of  his  own  wants, 
but  for  securing  in  the  future  a  revenue  wherewith  to  sat- 
isfy them;  whether  the  capital  be  in  the  form  of  ships 
and  warehouses,  materials  or  goods  in  stock,  cash  ready 
for  investment  or  a  dwelling  let  to  a  tenant.  But  for  the 
community  as  a  whole,  and  with  regard  to  the  mode  in 
which  different  sorts  of  wealth  bear  on  general  prosperity, 
such  a  distinction  is  far  from  satisfactory.  The  dwelling 
owned  by  A  and  let  to  B  is  capital,  under  Adam  Smith's 
definition;  but  if  bought  and  occupied  by  B  it  ceases,  un- 
der the  same  definition,  to  be  capital.*  The  place  which 
it  has  among  the  possessions  of  the  community  does  not 
change  by  its  sale  and  transfer;  it  still  forms  part  of  the 
apparatus  for  shelter  and  enjoyment.  Again  :  the  horses 
and  carriages  of  the  stable-keeper  would  be  capital,  in 
Adam  Smith's  sense,  since  he  uses  them  as  a  means  of  se- 
curing revenue;  but  the  equipages  maintained  by  those 
rich  enough  to  own  such  a  luxury  for  themselves  would 
not  be  capital.  Here,  too,  both  forms  of  wealth  clearly 
belong  together,  so  far  as  their  position  and  effect  in  the 
welfare  of  the  community  are  concerned.  Since  the  causes 
that  affect  the  prosperity  of  the  community,  and  not  those 
that  affect  the  prosperity  of  the  individual,  primarily  come 
within  the  scope  of  economic  science,  it  is  inadvisable  to 
use  a  definition  which,  like  Adam  Smith's,  gives  different 

*  Compare,  however,  what  is  said  below,  in  Part  II,  Chapter  \  II, 
page  147,  of  the  manner  in  which  Adam  Smith  qualified  his  definition  in 
regard  to  these  forms  of  durable  wealth. 


CAPITAL   AND   WAGES.  2g 

names  to  things  that  have  the  same  relation  to  the  gen- 
eral welfare. 

The  next  generation  of  the  classic  writers,  under  the 
lead  of  Ricardo,  did  not  usually  fall  into  the  error  of  con- 
sidering economic  phenomena  from  the  point  of  view  of 
the  individual  rather  than  of  the  community.  Indeed, 
their  greatest  errors  often  arose  from  an  excess  in  the 
other  direction  :  they  regarded  things  so  much  in  the  mass 
that  they  neglected  many  important  details.  So  far  as 
capital  was  concerned,  they  gave  up  Adam  Smith's  defini- 
tion, and  substituted  one  in  more  general  terms :  capital 
was  the  wealth  used  for  the  production  of  further  wealth. 
What  was  to  be  included  under  capital  was  explained  more 
explicitly  by  the  retention  of  the  division  of  capital  into 
fixed  and  circulating.  Adam  Smith  first  applied  this  dis- 
tinction and  the  words  for  indicating  it ;  but  the  later 
writers  adopted  a  different  line  of  division  from  that  of 
the  originator.*  Fixed  capital  consisted  of  tools  and  im- 
plements used  in  a  succession  of  operations.  Circulating 
capital  consisted  of  things  that  could  be  used  only  once 
and  then  were  gone ;  it  was  divisible  into  materials  on  the 
one  hand,  and  means  of  support  for  laborers  on  the  other. 
Gradually  there  developed  the  tradition  of  separating 
capital  into  three  constituent  parts, — fixed  capital,  raw 
materials,  and  wages  fund  ;  an  enumeration  which  gave 
point  and  precision  to  the  vague  phrase  that  capital  con- 
sisted of  the  wealth  used  for  producing  more  wealth. 

The  part  of  the  later  classic  definition  of  capital  which 
is  pertinent  for  our  purpose  is  the  wages  fund.  For  two 
generations  no  one  thought  of  doubting  that  the  food  and 


*  For  the  history  of  this  phase  of  economic  speculation,  which  is 
touched  here  in  the  briefest  way,  the  reader  is  referred  to  Mr.  Carman's 
thorough  and  accurate  History  of  the  Theories  of  Production  and  Distri- 
bution from  1776  tj  184.8, 


30  WAGES   AND   CAPITAL. 

other  goods  which  supported  laborers  were  part  of  capi- 
tal. Even  in  the  first  attacks  on  the  wages-fund  doctrine 
there  was  no  disposition  to  proceed  to  a  revision  of  the 
conception  of  capital.  Yet  no  satisfactory  solution  of  the 
controverted  questions  about  wages  is  possible  without 
some  overhauling  of  the  older  classification  and  definition 
of  capital. 

Bearing  in  mind  still  that  our  point  of  view  must  be 
not  that  of  the  individual,  but  that  of  the  community  as  a 
whole,  we  can  readily  see  how  the  commodities  which 
form  the  wages-fund  part  of  the  capital  of  the  classic 
writers,  in  some  ways  at  least,  are  of  a  different  sort  and 
perform  a  different  function  from  the  other  constituent 
parts.  Food,  clothes,  boots,  house-room,  ornaments, — any 
and  all  the  commodities  consumed  by  laborers, — consti- 
tute the  wages  fund.  These  are  enjoyable  and  consum- 
able commodities.  Plant  and  materials,  whether  called 
fixed  or  circulating  capital,  are  inchoate  wealth.  The 
former  are  real  income — the  latter  are  not.  The  ques- 
tion on  which  economists  in  our  day  differ,  and  in  regard 
to  which  there  are  serious  difficulties,  is  whether  the  en- 
joyable form  of  wealth  called  the  wages  fund  is  so  like 
the  inchoate  as  fairly  to  be  grouped  under  the  same  gen- 
eral name  of  capital. 

On  the  one  hand,  it  may  be  urged  in  favor  of  the  old- 
fashioned  view  that  the  laborers  must  have  the  where- 
withal to  live  and  to  keep  themselves  in  working  condition 
in  order  that  productive  operations  shall  be  continuous 
and  effective.  The  succession  of  efforts  which  was  de- 
scribed in  the  last  chapter,  and  the  extension  of  the  work- 
ing process  over  a  long  stretch  of  time,  make  it  necessary 
that  a  considerable  stock  of  commodities  should  exist  in 
completed  or  partly  completed  form.  In  order  that  the 
successive  division  of  labor  may  achieve  its  wonderful 
results,  there  must  be  not  only  tools,  machinery,  and 


CAPITAL   AND   WAGES.  3! 

materials,  but  bread,  meat,  and  clothing  for  the  active 
workers.  Some  such  supplies  there  must  be  at  once,  for 
the  needs  of  to-day ;  others  must  be  ready,  or  nearly 
ready,  for  the  morrow.  A  stock  of  enjoyable  goods  is  as 
essential  for  effective  and  abundant  production  as  is  the 
array  of  inchoate  wealth  through  all  the  stages  of  produc- 
tive effort.  The  necessary  enjoyable  commodities  are  thus 
like  the  inchoate  wealth,  in  being  indispensable  parts  of  the 
provision  essential  for  any  production  advanced  beyond 
the  most  rudimentary  stage. 

The  view  that  such  enjoyable  commodities  are  to  be 
regarded  as  capital  was  strengthened  by  the  belief  of  the 
older  writers  as  to  the  quality  and  quantity  of  real  wages 
which  laborers  were  likely  to  get.  In  the  days  when  the 
wages-fund  doctrine  and  all  that  went  with  it  held  full 
sway,  the  laborers  were  usually  thought  of  as  getting 
"natural"  wages  and  no  more.  This,  again,  was  rather 
assumed  and  implied  than  expressly  and  carefully  stated. 
It  was  the  result  partly  of  a  very  old  tradition  ;  for  before 
the  days  of  Adam  Smith  and  of  the  classic  school  the 
common  statement  in  regard  to  wages,  and  indeed  almost 
the  only  statement,  was  that  they  depended  on  what  was 
needed  to  maintain  the  race  of  laborers.  It  was  partly 
due  to  the  conditions  of  the  time  when  the  wages-fund 
doctrine  got  its  hold,  day-laborers'  wages  being  doubtless 
little  above  the  minimum  in  the  early  part  of  the  century 
in  most  European  countries.  It  was  in  good  part  due  to 
the  indelible  impression  which  Malthus's  writings  on  pop- 
ulation made  on  two  generations  of  thinkers.  At  all 
events,  for  one  reason  and  another,  laborers  were  com- 
monly described  as  getting  "natural"  wages,  and  no 
more  ;  only  so  much  as  in  the  nature  of  things  they  must 
have. 

Here,  again,  there  was  a  curious  intermingling  of  very 
different  trains  of  thought.  The  "natural  "  wages,  which 
4 


32  WAGES   AND   CAPITAL. 

Ricardo  said  laborers  must  have,  were  not  stated  to  be 
the  simple  physical  necessaries.  They  were  the  wages 
which  habit  and  custom  rendered  necessary  ;  the  wages 
without  which  the  laborers  would  not  marry  and  rear 
children,  and  which,  if  exceeded,  would  lead  them  to 
marry  earlier  and  have  more  children.  In  this  sense, 
necessary  or  natural  wages,  as  fixed  by  the  standard  of 
living,  might  be  a  great  deal  more  than  the  bare  necessa- 
ries of  life.  But  while  Ricardo  and  his  followers  of  the 
wages-fund  school  said  explicitly  that  natural  wages  were 
determined  by  the  standard  of  living,  not  by  the  physical 
minimum,  they  thought  of  that  standard  as  universally 
low.  Any  general  statement  they  might  make  at  the  out- 
set as  to  a  possible  high  standard  was  usually  forgotten  or 
put  aside  as  they  went  on.  Half  unconsciously,  they  con- 
verted the  original  conception  of  habitual  "  necessaries  " 
into  a  conception  of  physical  necessaries.  Largely  for 
this  reason  the  wages  which  laborers  got  were  thought 
of  as  needed  in  their  entirety  to  maintain  working 
strength.  Thence  it  was  a  natural  step  to  think  of  them 
as  necessary  for  the  maintenance  of  productive  effort, 
and  therefore  as  capital. 

So  much  as  to  the  grounds,  and  the  reasons  for  the 
former  easy  acceptance,  of  the  view  that  commodities  in- 
dispensable for  the  workers  are  to  be  called  capital.  But 
that  view  is  open  to  objections  for  the  purposes  of  almost 
any  economic  inquiry,  and  to  very  serious  objections  for 
those  of  the  inquiry  here  in  hand. 

In  the  first  place,  the  situation  of  the  laborers  in  gen- 
eral is  not  so  desperate  as  Ricardo  and  his  followers  were 
apt  to  assume.  Even  at  the  time  when  they  wrote  there 
were  great  strata  among  the  workers  who  got  more  than 
the  minimum  needed  to  keep  them  in  working  condition. 
In  our  own  more  prosperous  clays  the  large  majority 
of  laborers  are  in  this  better  situation.  Hence  only  part 


CAPITAL   AND   WAGES.  33 

of  the  commodities  which  they  get  could  be  considered 
capital  in  the  sense  of  being  indispensable  to  production. 
Only  what  the  older  writers  called  "productive  consump- 
tion "  could  be  so  classed, — the  consumption  without  which 
the  maintenance  of  efficient  production  was  impossible.  It 
would  follow  that,  in  the  great  majority  of  cases,  wages 
must  be  regarded  as  paid  in  part  not  out  of  capital  but 
out  of  some  other  source  ;  the  unproductive  consumption 
having  no  resemblance  to  tools  and  other  effective  appa- 
ratus of  production.  The  proposition  that  wages  are  paid 
from  capital,  stated  and  limited  in  this  way,  would  be  a 
different  one  from  that  of  the  classic  school;  for  this 
school,  to  repeat  what  was  said  a  moment  ago,  regarded 
all  wages  as  paid  entirely  from  capital.  Modified  as  the 
proposition  must  be  in  view  of  a  more  prosperous  con- 
dition of  laborers,  it  makes  an  unexpected  division,  and 
on  the  face  of  things  an  illogical  one,  of  real  wages  into 
two  parts,  derived  from  different  sources. 

This  difficulty  becomes  even  more  serious  if  we  en- 
large the  meaning  of  the  terms  "  laborers  "  and  "produc- 
tion," in  the  manner  likely  to  find  acceptance  among  most 
economists  of  our  own  day.  The  older  English  writers, 
when  speaking  of  wages  in  general  and  of  the  wages 
fund,  commonly  thought  of  those  engaged  in  manual  work 
alone  as  "productive  laborers."  In  every  direction  the 
conception,  if  it  is  to  be  consistent  and  satisfactory,  must 
be  enlarged.  Not  only  those  who  work  with  their  hands, 
but  those  who  work  with  their  heads,  are  productive;  not 
only  those  who  turn  out  a  tangible  product,  but  all  who 
serve  human  wants.  This  is  not  the  place  for  a  disquisi- 
tion on  these  much-disputed  questions  of  terminology. 
It  is  clear  that  the  engineer  and  the  business  manager 
are  as  productive  as  the  hod-carrier  and  the  mechanic. 
It  is  clear,  too, — though  not  so  universally  admitted, — 
that  there  is  no  ground  for  real  distinction  between 


34  WAGES   AND   CAPITAL. 

those  whose  labor  does  and  those  whose  labor  does  not 
issue  in  a  "  material  "  commodity.  The  actor  and  the 
painter,  the  maid-servant  and  the  maker  of  table  linen, 
alike  minister  to  the  ease  and  enjoyment  of  life,  and  in 
this  essential  sense  are  alike  productive.  In  neither  of 
the  directions  here  suggested  did  the  older  writers  think 
of  applying  their  reasoning  as  to  capital  and  the  wages 
fund.  The  income  neither  of  the  active  business  man 
nor  of  the  house  servant  was  thought  to  have  anything 
to  do  with  the  payment  of  wages  from  capital.  Yet  the 
"  productive  "  consumption  of  these,  as  well  as  of  manual 
laborers,  is  essential  for  the  procuring  of  the  community's 
enjoyable  revenue.  It  may  be  a  question  how  far  we 
should  extend  the  term  "productive  "  as  applied  to  labor; 
and  some  would  doubtless  not  be  disposed  to  go  as  far 
as  the  present  writer.*  But  it  would  be  impossible  to 

*  If  a  distinction  between  productive  and  unproductive  labor  is 
still  to  be  made,  it  would  seem  that  it  could  be  done  only  on  the  lines  of 
separating  that  labor  which  is  essential  and  effective  for  the  processes  of 
production  as  now  organized,  and  that  labor  which  is  only  an  incidental 
and  perhaps  dispensable  adjunct  of  them.  No  one  would  deny  that  the 
merchant  whose  activity  serves  to  bring  together  commodities  and  then 
to  despatch  them  where  needed,  is  productive.  But  side  by  side  with 
him  is  the  speculator  who  but  watches  the  tricks  and  turns  of  trade  ; 
indeed,  the  merchant  himself  is  often,  in  half  his  activity,  no  more  than 
a  speculator.  The  banker,  again,  aids  to  put  capital  into  the  hands  of 
those  likely  to  make  good  use  of  it,  and  so  is  productive  ;  but  who  would 
say  that  any  and  every  "banker  and  broker"  in  our  great  cities  per- 
forms functions  really  serviceable  for  the  community?  No  doubt  it  is 
difficult  to  draw  the  line  in  all  such  cases  between  the  activity  which 
contributes  to  social  welfare  and  that  which  does  not  ;  and  some  allow- 
ance must  be  made  for  the  inevitable  useless  hangers-on  in  every  occupa- 
tion. Vet,  when  every  allowance  is  made,  it  is  difficult  to  believe  that 
all  the  work  of  the  crowds  of  speculators,  brokers,  "business  men,"  in 
the  cities  of  modern  times,  is  in  any  solid  sense  helpful  for  the  organiza- 
tion and  direction  of  industry.  Much  of  it  means  simply  that  the  condi- 
tions of  a  complicated  division  of  labor  make  it  possible  to  pick  up,  by 


CAPITAL   AND   WAGES.  35 

stop,  as  the  older  economists  did,  with  manual  laborers. 
What  is  needed  to  maintain  the  active  manager  of  in- 
dustry and  the  merchant,  the  engineer  and  the  inventor, 
the  physician  and  lawyer  (so  far  as  the  services  of  such 
are  needed  to  keep  laborers  in  health  and  business  affairs 
smooth-working), — all  this  is  surely  capital  in  the  same 
sense  as  the  indispensable  food  of  the  ploughman.  We 
thus  should  get  a  conception  of  capital  and  the  wages 
fund  applicable  not  to  all  the  income  of  a  part  of  the 
laborers,  but  to  a  part  of  the  income  of  all  of  the  la- 
borers. 

Once  this  conception  is  reached,  however,  it  becomes 
more  and  more  difficult  to  maintain  that  there  is  a  real 
resemblance  between  wages-fund  and  other  capital,  and 
a  real  distinction  between  one  and  the  other  part  of  real 
income.  After  all,  the  commodities  which  go  to  one  and 
another  sort  of  laborers,  whether  necessaries  or  comforts 
or  luxuries,  are  immediate  sources  of  satisfaction.  They 
are  consumed,  not  to  enable  work  to  be  done,  but  as  the 
result  of  work  being  done.  They  represent,  not  a  stage 
in  the  production  of  wealth,  but  the  consumption  and  en- 
joyment of  wealth.  Men  are  not  to  be  regarded  as  cattle, 
fed  and  tended  as  a  means  toward  an  end.  Their  con- 


shrewdness  or  by  luck,  large  or  small  shares  of  income  that  represent  no 
contribution  to  general  welfare.  Something  of  this  sort  doubtless  un- 
derlies the  distinction  between  unproductive  and  productive  labor  (and 
capital  as  well)  which  has  been  laid  down  by  one  of  the  most  ingenious 
and  suggestive  of  the  theoretic  writers  of  modem  times, — Professor  Loria, 
in  the  Analisi  de  la  Propricta  Capitalista.  Exaggerated  and  often  forced 
as  are  the  attacks  on  "  unproductive  "  labor  and  capital  by  that  writer, 
they  yet  seem  to  point  out  the  way  to  an  instructive  line  of  distinc- 
tion. Much  of  the  activity  of  lawyers,  of  financiers,  of  those  who  buy 
and  sell  on  'Change,  can  be  said  to  be  but  incidental  to  the  really  ef- 
fective work  of  modern  industry,  not  essential  or  even  perceptibly 
helpful. 


36  WAGES   AND   CAPITAL. 

sumption  is  the  object  of  all  production.  Therefore  it  is 
to  be  regarded  as  income,  and  as  single  and  indivisible 
income. 

The  total  flow  of  enjoyable  goods  and  services  which 
is  regularly  coming  into  the  possession  of  society  is  thus 
best  considered  as  one  great  mass  of  homogeneous  in- 
come, different  from  the  inchoate  wealth  which  is  on  all 
hands  admitted  to  be  capital.  The  members  of  the  com- 
munity, whether  capitalists  or  landowners,  headworkers 
or  handworkers,  idle  or  industrious,  all  form  one  body 
of  consumers.  There  are,  indeed,  differences  in  the  causes 
which  bring  income  to  one  set  or  another;  and  even 
among  those  whose  income  is  only  a  return  for  labor,  there 
are  important  differences  both  in  the  forces  affecting  the 
size  of  the  income  and  in  the  machinery  by  which  it  gets 
into  different  hands.  But  all  together  constitute  the  com- 
munity, and  the  whole  fund  or  flow  of  enjoyable  things 
constitutes  their  real  income.  If  we  conceive  the  com- 
munity to  be  organized  on  a  collectivist  basis — a  proced- 
ure which  often  helps  to  bring  out  the  essentials  of  social 
life — we  readily  see  that  the  total  of  enjoyable  things  se- 
cured in  any  one  season  would  be  regarded  as  its  real 
available  income,  apportionable  among  the  various  mem- 
bers in  any  desired  manner,  partly  necessary  for  life  and 
strength,  partly  luxury,  but  not  to  be  called  part  capital 
and  part  non-capital. 

It  would  seem  best,  therefore,  to  let  the  term  capital 
stand  simply  for  inchoate  wealth:  for  all  the  possessions 
that  do  not  yet  serve  human  wants.  Tools  and  machines, 
factories  and  warehouses,  raw  materials  and  half-finished 
and  nearly  finished  goods, — these  all  go  together  as  be- 
ing not  directly  conducive  to  enjoyment;  while  all  forms 
of  finished  commodities, — food,  houses,  clothes,  orna- 
ments,— belong  together  as  enjoyable  wealth  and  as  in- 
come. The  successive  steps  by  which  inchoate  wealth  is 


CAPITAL   AND   WAGES.]  37 

finally  converted  into  enjoyable  wealth  were  described  in 
the  last  chapter;  the  same  description  would  serve  now 
to  distinguish  capital  from  wealth  in  general.  Hereafter 
capital  will  be  used  in  the  sense  indicated :  the  tangible 
apparatus  for  the  production  of  wealth,  and  so  all  the 
goods  still  in  the  stage  preparatory  to  final  enjoyment.* 

These  questions  of  terminology  and  classification, 
however,  happen  to  be  of  less  importance  for  the  pur- 
poses of  the  present  inquiry  than  for  some  other  parts  of 
economic  analysis.  In  whatever  sense  we  use  the  term 
capital,  it  will  still  appear  that  current  wages,  considered 
with  reference  to  any  but  a  very  short  period  of  time,  are 
derived  in  the  main  from  capital.  The  grounds  of  this 
statement,  apparently  in  contradiction  with  the  outcome 
of  the  preceding  discussion,  need  some  detailed  expla- 
nation. 

In  the  last  chapter  it  was  pointed  out  that  flow  rather 
than  fund  was  the  word  appropriate  for  describing  the 
mode  i.n  which  the  community's  income  of  enjoyable  com- 
modities becomes  available.  If  this  is  true  in  regard  to 
the  process  by  which  productive  labor  yields  its  regular 
return,  it  is  still  more  true  in  regard  to  the  accretions  of 
real  income  which  form  current  wages. 


*  Whether  or  no  the  term  capital  should  be  used  in  the  narrower 
sense  to  which  preference  is  given  in  the  text,  or  in  a  wider  sense  to  in- 
clude the  things  needful  for  workers,  it  seems  to  be  agreed  that  some 
phraseology  should  be  adopted  for  distinguishing  the  two  parts  which  in 
some  regards  are  so  essentially  different.  Thus  Professor  Marshall,  many 
years  ago,  in  his  Economics  of  Industry,  suggested  the  terms  "  auxiliary" 
and  "  remuneratory  "  capital  ;  and  in  the  third  edition  cf  his  Principles 
of  Economics  uses  the  phrases  "production  capital"  and  "consumption 
capital."  Such  a  practice  may  cause  ambiguity  when  the  word  capital 
is  used  alone,  and,  on  the  whole,  does  not  seem  to  me  indispensable  in 
order  to  bring  out  the  fact  that  some  supplies  for  the  workers  are  needed 
for  the  operations  of  production. 


38  WAGES   AND   CAPITAL. 

Doubtless  some  of  the  enjoyable  goods  now  available 
possess  the  characteristics  of  a  fund  rather  than  of  a  flow. 
Those  of  a  more  durable  sort  exist  rather  as  a  fund,  those 
of  a  more  perishable  sort  rather  as  a  flow.  Houses  and 
house  furniture  are  fully  finished  and  ready,  available 
now  and  likely  to  remain  available  for  a  considerable 
space  to  come.  Food  stands  at  the  other  extreme, 
being  usually  perishable,  and  existing  in  no  great  stock. 
Grain  in  the  bin,  flour  in  the  merchant's  stock,  cattle 
on  the  fields, — various  half-way  stages, — these  are  the 
more  typical  forms  in  which  supplies  of  food  available 
for  the  early  future  exist.  Clothing  stands  midway  :  a 
present  stock  is  immediately  available,  and  will  last  some 
little  time,  yet  needs  constant  renewal  at  comparatively 
short  intervals.  The  difference  clearly  is  one  of  degree, 
not  of  kind.  One  of  the  important  commonplaces  which 
the  classic  economists  insisted  on  was  that  all  wealth 
is  being  constantly  consumed  and  reproduced,  the  differ- 
ences in  durability  being  simply  differences  of  degree. 
But  these  differences  are  very  great  ;  so  great  that  we 
may  speak  of  the  commodities  of  which  dwelling  houses 
are  the  familar  and  typical  example  as  being  for  consid- 
erable stretches  of  time  a  present  and  permanent  fund  of 
enjoyment. 

If  these  more  permanent  sources  of  satisfaction,  now 
existing  and  available,  were  the  things  from  which  the 
real  income  of  current  work  were  regularly  and  mainly 
derived,  they  would  have  some  resemblance  to  the  "  fund  " 
of  which  the  older  writers  spoke.  But,  in  fact,  they  are 
usually  the  reward  of  the  labor  of  the  past.  They  have 
played  their  part  in  distribution,  and  are  now  the  estab- 
lished possessions  of  those  whose  former  labor,  or  other 
source  of  income,  has  enabled  them  to  be  bought.  Clothes, 
household  furniture  and  implements,  food  in  the  larder, — 
these  have  been  bought  with  the  money  income  of  former 


CAPITAL   AND   WAGES. 


39 


days,  and  now  are  the  settled  property  of  their  owners. 
They  have  nothing  to  do  with  current  wages  or  profits 
or  rents.  No  doubt  they  can  be  sold,  though  usually  at 
a  disadvantage.  But  when  sold,  they  merely  pass  from 
one  hand  to  another:  what  one  gains  in  the  way  of  fresh 
real  income  another  loses.  The  total  available  for  the 
community  becomes  no  more  or  less.  Moreover,  since 
their  sale  rarely  causes  them  to  shift  from  one  class  in 
society  to  another,  the  real  income  of  the  several  classes 
becomes  no  more  or  less.  They  belong  to  the  distribution 
of  the  past,  not  of  the  present. 

It  may  be  remarked,  incidentally,  that  commodities  of 
the  sort  now  under  discussion  have  sometimes  been  called 
capital  in  a  sense  different  from  any  yet  noticed,  and 
perhaps  deserving  a  moment's  attention.  They  are  dura- 
ble sources  of  satisfaction.  While  they  may  be  described 
as  a  fund,  because  not  needing  prompt  renewal,  they  may 
be  also  described  as  yielding  a  continual  flow  of  utilities. 
The  utilities  which  they  yield  can  not  all  be  enjoyed  at 
once  ;  they  are  of  necessity  distributed  over  some  stretch  of 
time.  The  house  or  suit  of  clothes  may  be  considered  as 
throwing  off,  so  to  speak,  successive  instalments  of  sat- 
isfaction. They  are  thus  analogous  to  machines,  which 
may  also  be  considered  as  continually  throwing  off  utili- 
ties, embodied  in  the  enjoyable  commodities  which  they 
serve  to  produce.  Hence  various  thinkers,  of  curiously 
different  schools  and  tendencies,  have  come  to  the  conclu- 
sion that  the  durable  sources  of  immediate  satisfaction  are 
capital,  like  machines  and  other  means  of  providing  utili- 
ties; and,  since  duration  is  only  a  question  of  degree,  have 
concluded  that  all  material  commodities  of  any  sort  are 
substantially  capital.*  But  there  remains  an  essential 


4O  WAGES   AND   CAPITAL. 

and  indeed  all-important  distinction  between  the  com- 
modities of  which  the  dwelling  house  is  the  type,  and 
those  of  which  the  machine  is  the  type.  While  both  may 
be  said  to  yield  successive  utilities,  the  one  does  so  with- 
out further  human  exertion,  the  other  only  after  more  or 
less  of  labor.  The  dwelling  house  is  a  completed  en- 
joyable thing,  available,  until  the  moment  for  repair  or 
renewal  comes,  without  further  labor.  So  are  clothes 
and  boots  and  household  effects  in  their  several  degrees. 
They  are  in  this  important  sense  income,  and  so  distin- 
guishable from  wealth  still  inchoate;  even  though  they 
are  income  that  from  its  nature  stretches  necessarily  over 
some  space  of  time. 

To  return  from  this  digression  to  the  main  course 
of  the  argument.  It  has  been  said  that  durable  sources 
of  satisfaction  usually  belong  to  the  distribution  of  the 
past,  being  secured  and  realized  wages  or  profits  or  rents. 
To  this  general  statement  there  is  at  least  one  important 
exception :  in  the  case  of  dwelling  houses  occupied  by 
others  than  their  owners.  Such  houses  are  paid  for  by 
the  tenants  out  of  their  current  money  income,  and  the 
shelter  which  they  yield  is  thus  a  constituent  of  their 
current  real  income.  They  therefore  play  a  part  in  the 
process  of  distribution  which  is  going  on  in  the  present. 
The  exception  is  particularly  important  in  regard  to  those 
classes  with  whom  we  usually  associate  the  word  wages 
and  with  whom  the  wages-fund  doctrine  is  supposed  more 
especially  to  deal.  Hired  manual  laborers  are  more 
often  tenants  than  owners  of  their  dwellings.  Their 


280-287  ;  Cohn's  N'ationaloekonomie,  §  147.  In  general,  I  have  en- 
deavored to  avoid  cumbering  this  first  part  with  literary  references,  re- 
serving such  matters  to  their  appropriate  places  in  the  second  part.  But 
this  particular  phase  of  the  discussion  on  capital  will  not  again  be 
touched. 


CAPITAL   AND   WAGES.  4! 

clothing,  household  furniture,  and  some  stock  of  food 
on  hand  they  usually  own,  these  having  been  bought 
with  income  of  former  days.  But  their  dwellings  are  not 
commonly  their  own  property.  The  shelter  and  comfort 
which  their  houses  yield  are  thus  paid  for  out  of  current 
income,  and  are  part  of  current  real  wages.  The  dwell- 
ings themselves,  being  enjoyable  at  once  without  further 
labor,  are  part  of  the  community's  real  income  and  not  of 
its  capital.  The  source  of  this  part  of  current  wages  is, 
then,  not  social  capital,  but  social  income.* 

More  commonly,  however,  the  commodities  which  con- 
stitute real  wages  are,  at  the  time  when  the  work  is  done, 
still  in  the  last  of  the  inchoate  stages :  they  are  just  on 
the  point  of  emerging  from  capital  into  income.  They 
are  in  shopkeepers'  hands,  awaiting  purchase.  The  last 
step  in  production  is  not  completed  until  they  reach  the 
hands  of  the  consumer  whose  wants  they  satisfy.  Until 
that  moment  they  are  still  strictly  to  be  considered  as 


*  It  may  indeed  be  contended  that  the  final  stage  in  the  work  needed 
for  full  enjoyment  is  not  reached  until  the  letting  of  the  house  is  accom- 
plished. As  the  labor  of  the  shopkeeper  is  the  last  step  in  the  long 
series  of  efforts  which  bring  his  goods  to  the  consumer's  hands,  so  the 
house  agent  or  active  landlord  does  his  share  in  the  work  of  bringing  the 
dwelling  at  last  to  serve  the  tenant's  wants.  The  relatively  high  rent  of 
the  tenements  occupied  by  the  poorest  laborers,  which  require  much 
care  and  repeated  attention  in  the  business  of  letting  them  and  collect- 
ing the  rents,  is  the  concrete  expression  of  this  fact.  The  dwellings 
hired  by  tenants  might  thus  be  said  to  emerge  from  the  stage  of  capital 
into  that  of  enjoyment  and  income  by  successive  slight  acts  of  exertion. 
But  it  would  be  a  mistake  to  make  anything  of  refined  reasoning  of 
this  sort.  Substantially,  the  dwellings,  whether  hired  or  owned,  may 
be  regarded  as  available  and  enjoyable,  and  as  present  sources  of  real 
income. — For  another  case  in  which  substantial  truth  is  reached,  even 
with  some  violation  of  theoretical  nicety,  compare  what  is  presently  said 
in  the  text,  at  page  42,  of  the  purchases  of  household  tools  by  retail 
buyers. 


42  WAGES   AND   CAPITAL. 

capital.  Hence,  the  source  of  real  wages  exists,  in  the 
main,  in  the  form  of  capital  at  the  time  when  the  work 
is  done. 

This  is  more  obviously  and  more  completely  the  case 
if  v/e  consider  not  a  short  period,  but  any  considerable 
stretch  of  time.  It  is  not  to  be  doubted  that  the  wages 
of  such  a  longer  period  exist  now  mainly  in  the  form  of 
goods  not  yet  enjoyable.  The  bread  for  the  coming  season 
must  come  from  the  grain  now  in  store ;  the  clothes  from 
the  cotton  and  the  wool,  the  yarns  and  the  undyed  stuffs; 
and  so  on.  Whatever  our  conclusion  as  to  the  income  of 
this  day  or  this  week,  it  is  certain  that  the  income  of  the 
current  year  is  to  be  derived  mainly  from  what  has  been 
capital'during  its  course. 

Lest  there  be  misconception,  some  further  aspects  of 
the  sources  and  constituents  of  real  enjoyment  may  be 
briefly  considered.  It  has  been  tacitly  assumed  in  the 
preceding  paragraphs  that  real  income  is  secured,  and  en- 
joyment begins,  when  commodities  pass  from  the  counter 
of  the  retail  shopkeeper  into  the  hands  of  the  purchaser. 
In  literal  strictness  some  modification  of  this  assumption 
would  be  needed.  Flour  in  the  larder,  though  owned  by 
those  who  are  to  enjoy  it,  is  not  yet  a  source  of  enjoy- 
ment; and  a  cooking  stove  or  sewing  machine  belongs  to 
the  class  of  inchoate  wealth  as  much  as  a  baker's  oven  or 
a  spinning  mill.  Not  a  little  apparatus  is  thus  beyond  the 
last  stage  in  buying  and  selling,  and  yet  still  in  the  stage 
of  inchoate  wealth.  In  a  strict  enumeration  and  classifi- 
cation of  the  community's  income  and  capital,  such  appa- 
ratus would  need  to  be  put  in  the  latter  class.  But  for 
the  purposes  of  everyday  life,  it  may  be  questioned 
whether  anything  is  gained  by  following  the  division  be- 
tween capital  and  non-capital  beyond  the  last  stage  in  the 
processes  of  exchange.  The  retail  purchaser  considers  the 
commodities  which  he  buys  as  serving  for  the  direct  satis- 


CAPITAL   AND    WAGES. 


43 


faction  of  his  wants  from  the  moment  they  pass  into  his 
possession.  Even  though  they  serve,  like  the  cooking 
stove  or  the  sewing  machine,  for  an  ulterior  purpose  and  a 
later  satisfaction,  they  do  not  stand  in  his  mind  side  by 
side  with  the  tools  of  his  trade. 

It  often  happens,  indeed,  that  current  income  is  inten- 
tionally used  in  a  manner  to  postpone  satisfaction  :  when 
it  is  saved  and  invested.  Saving  may  take  the  form  of 
a  direct  purchase  of  inchoate  wealth,  as  when  the  manu- 
facturer buys  more  machinery  and  materials  out  of  his 
current  gains.  Quite  as  often  it  takes  the  indirect  form 
of  the  purchase  of  securities  and  obligations,  whence  a 
fixed  future  income  is  expected.  In  either  case  there  is  a 
conscious  postponement  of  enjoyments  which  might  now 
be  had.  Some  of  the  effects  of  this  sort  of  postponement 
on  the  problems  connected  with  the  wages  fund  will  re- 
ceive attention  at  a  later  stage.  They  are  referred  to 
here  by  way  of  contrasting  them  with  the  postponement 
which  is,  so  to  speak,  unconscious.  For  all  practical  pur- 
poses, real  satisfaction  and  real  income  may  be  said  to 
begin  when  the  consumer  buys  goods  or  services  for  his 
own  direct  use;  whether  that  use  yield  him  enjoyment  at 
once,  or  only  after  some  further  labor  has  been  applied 
by  himself  or  his  household.  The  things  so  procured, 
bought  ordinarily  over  the  counter  of  the  retail  shop- 
keeper, may  be  considered,  without  sensible  departure 
from  the  substantial  truth,  as  real  income ;  and  that  in- 
come does  not  emerge  finally  from  the  stage  of  capital 
until  the  moment  of  purchase. 

In  this  sense,  then,  we  may  lay  it  down  broadly  that 
wages  are  derived  from  capital.  In  terms,  the  proposition 
is  very  similar  to  that  which  the  classic  writers  had  main- 
tained ;  but  the  terms  are  used  in  different  senses.  Wages 
mean  all  the  income  of  all  laborers;  capital  means  that 
supply  of  inchoate  goods,  in  all  the  stages  toward  com- 


44 


WAGES   AND   CAPITAL. 


pletion,  from  which  the  steady  flow  of  real  income  is  de- 
rived. In  the  main,  the  commodities  from  which  the 
labor  of  the  immediate  present  and  the  early  future  gets 
its  reward  exists  not  as  a  store  of  already  enjoyable 
things,  but  as  a  varied  assortmenfof  things  nearly  finished. 
Those  from  which  the  labor  of  the  present  season — a 
longer  stretch  of  time — gets  its  reward,  exist  as  an  assort- 
ment of  things  less  nearly  completed.  Some  of  the  more 
durable  forms  of  enjoyable  wealth,  such  as  houses,  furni- 
ture, clothing,  do  indeed  form  rather  a  store  or  fund,  not 
needing  still  to  be  brought  to  the  stage  of  fruition;  but 
these  are  usually  possessions  in  hand,  the  reward  of  past 
labor  or  the  realization  of  past  income,  secured  in  a  form 
which  continues  to  yield  satisfaction  for  a  longer  or 
shorter  stretch  of  time.  The  case  of  house  shelter  pre- 
sents an  exception,  where  houses  are  hired  and  current 
income  is  spent  for  the  use  of  a  durable  source  of  direct 
enjoyment.  Bearing  in  mind  such  exceptions,  it  may  be 
said  in  general  that  the  labor  of  the  present  and  of  the 
near  future,  still  more  the  labor  of  the  current  season 
or  cycle  of  production,  get  their  reward  in  some  part 
doubtless  from  commodities  which  are  now  so  fully  fin- 
ished as  to  be  virtually  enjoyable,  but  in  much  the  larger 
part  from  commodities  still  in  the  inchoate  stage,  and 
therefore  capital. 

The  proposition  that  wages  are  derived  from  capital, 
in  the  sense  in  which  it  has  been  developed  in  the  preced- 
ing pages,  evidently  has  a  different  meaning  from  the 
same  proposition  as  it  would  be  understood  by  one  hav- 
ing in  mind  the  relations  between  capitalists,  employers, 
and  hired  laborers.  Indeed,  in  any  sense  of  the  word 
"  capital  "  which  has  regard  to  functions  essential  for  the 
community,  employers  and  hiring  are  of  no  consequence. 
Whether  in  the  old  sense  of  a  stock  of  food  and  other 
necessaries,  stowed  away  and  essential  for  supporting 


CAPITAL   AND   WAGES. 


45 


laborers,  or  in  the  sense  of  a  supply  of  inchoate  wealth 
gradually  being  carried  forward  to  the  stages  of  fruition 
and  enjoyment, — capital  must  refer  to  real  and  tangible 
things.  It  must  mean  food  ready  or  soon  to  be  ready, 
clothes  in  hand  or  soon  to  be  in  hand.  It  has  nothing  to 
do  with  money  or  with  money  wages,  or  with  the  hiring 
of  laborers  by  employers,  or  with  the  wealth  of  the  indi- 
vidual capitalists.  The  relation  of  wages  to  capital,  as  de- 
scribed in  the  preceding  pages,  would  be  the  same  under 
any  social  organization:  whether  under  one  where  capital- 
ists and  laborers  were  completely  separated  and  laborers 
got  earnings  only  in  the  form  of  payments  stipulated  be- 
tween them  and  their  employers  ;  or  under  a  regime  of 
co-operative  production,  where  groups  of  laborers  owned 
their  own  tools  and  materials  and  shared  their  earnings; 
or  under  a  system  of  complete  collectivism,  where  the 
community  owned  the  inchoate  wealth,  and  apportioned 
among  the  members  only  the  accruing  increments  of  en- 
joyable commodities.  In  all,  production  would  be  spread 
over  a  considerable  stretch  of  time,  and  the  reward  of 
present  work  would  have  to  come,  for  any  longer  period, 
mainly  from  goods  still  in  the  making. 

But  the  payment  of  wages  from  capital  has  been  closely 
associated,  in  most  of  the  controversy  on  the  wages  fund, 
with  the  direct  dealings  of  employers  with  the  laborers 
whom  they  hire,  and  so  with  the  organization  of  society 
typical  of  modern  times.  It  has  been  supposed  to  be  the 
result  of  the  separation  of  capitalists  from  laborers,  and 
of  the  payment  of  wages  by  the  former.  This  association 
began  almost  with  the  first  stages  of  the  discussion.  The 
classic  economists  started  with  a  conception,  incomplete 
though  not  without  a  solid  basis  in  truth,  of  the  relation 
between  present  labor  on  the  one  hand  and  product  and 
capital  on  the  other.  But  their  conception  was  not  only 
incomplete;  it  was  vacillating.  Most  of  them  spoke, 


46 


WAGES   AND   CAPITAL. 


more  or  less  often,  of  the  funds  in  the  hands  of  the  im- 
mediate employer  as  capital  whence  wages  were  paid. 
The  capital  was  sometimes  described  as  food,  clothes, 
and  quantities  of  things  consumed  by  laborers;  but  quite 
as  often  it  was  enumerated  in  terms  of  money  and  of 
millions  sterling.  This  double  use  of  the  term,  and  the 
recurring  confusion  which  ensued,  will  receive  abundant 
attention  in  the  second  part  of  the  present  volume.  But 
it  may  be  well  at  this  stage  of  the  discussion  to  show  how 
great  is  the  confusion  to  which  it  leads,  and  how  impera- 
tive is  the  need  of  keeping  to  a  consistent  use  of  the  term 
capital :  which  can  best  be  accomplished  by  considering 
one  or  two  typical  cases  as  to  which  it  has  been  debated 
whether  or  in  what  way  wages  are  paid  from  capital. 

Perhaps  the  commonest  case  that  has  caused  per- 
plexity is  where  the  employing  capitalist  sells  his  wares 
before  he  pays  the  wages  to  his  laborers.  Wages  may 
be  paid  monthly  or  fortnightly  ;  meanwhile  the  employer 
sells  a  part  of  the  product,  and  so  secures  funds  for  pay- 
ing the  laborers.  How,  it  is  asked,  can  wages  in  such  a 
case  be  said  to  be  paid  from  capital  ?  Clearly  they  are 
not  paid  from  capital,  if  we  mean  by  that  term  money 
funds  on  hand  and  accumulated  when  production  begins, 
or  if  we  think  of  capital  as  necessarily  owned  by  the  indi- 
vidual who  pays  wages.  But  it  need  hardly  be  pointed, 
out  that  all  such  reasoning  and  questioning  does  not 
touch  real  capital  or  real  wages.  What  is  real  capital  ? 
Under  any  rational  conception,  not  money  or  funds,  but 
things  tangible  or  usable  ;  under  the  definition  accepted 
in  these  pages,  tools,  machinery,  and  materials,  and  all 
things  not  yet  in  enjoyable  form.  What  are  real  wages  ? 
Again,  not  money,  but  the  enjoyable  commodities  which 
the  laborer  gets.  These  he  buys  with  his  money  wages; 
and  the  important  question  is  the  relation  between  real 
wages  and  the  commodities,  enjoyable  and  on  the  way  to 


CAPITAL   AND   WAGES. 


47 


enjoyment,  which  form  respectively  income  and  capital 
for  the  community. 

Another  case  may  be  mentioned.  The  question 
whether  the  source  of  wages  at  any  given  time  is  an  elas- 
tic quantity  or  a  rigid  and  predetermined  one,  has  played 
an  important,  almost  a  decisive  part,  in  the  wages  fund 
controversy.  In  discussing  it  there  has  been  a  constant 
tendency  to  run  off  to  questions  of  the  employers'  means 
and  the  direct  money  wages  which  employers  pay  to  hired 
laborers.  What  the  bearing  of  hiring  and  of  employers' 
activity  is  on  the  controverted  questions,  we  shall  pres- 
ently consider.  But  it  would  never  be  denied,  though  it 
has  often  been  forgotten,  that  the  real  and  important  ques- 
tion as  to  the  elasticity  or  rigidity  of  a  wages  fund  must 
refer  to  real  wages,  not  to  money  wages.  Larger  payments 
by  employers  would  not  avail,  unless  there  were  more  com- 
modities ready  for  purchase.  Whether  there  are  more  com- 
modities ;  whether  the  supply  of  enjoyable  goods,  available 
or  soon  to  be  available,  is  settled  by  causes  that  have 
worked  in  the  past,  or  is  easily  swelled  by  causes  working 
in  the  present ;  these  are  the  substantial  questions. 
Whether  employers  can  pay  more  or  less,  is  only  one  step, 
and  by  no  means  the  crucial  one,  in  answering  them. 
Still  more  inadequate  for  a  satisfactory  answer  is  the  con- 
sideration whether  the  individual  employer's  means  for 
paying  laborers  are  fixed  or  elastic.  Of  all  this,  to  re- 
peat, more  will  be  said  in  one  and  another  part  of  the 
pages  to  come.  At  present  let  the  reader  bear  in  mind 
that  real  income,  real  wages,  and  real  capital  are  the 
essential  things,  and  that  any  propositions  which  we  may 
lay  down  must  be  applicable  to  the  relations  of  wages  and 
capital  in  this  sense. 

It  has  already  been  suggested  that  the  conclusions  of 
this  chapter,  as  to  the  relation  between  capital  and  real 
5 


48  WAGES   AND   CAPITAL. 

wages,  have  a  wider  application  than  the  old  doctrine  of 
the  wages  fund.  The  reasoning,  while  directed  to  wages, 
applies  equally  to  every  other  form  of  income.  Not 
only  laborers,  but  all  classes  in  the  community,  get  their 
present  remuneration  from  the  now  accruing  increments 
of  enjoyable  goods.  That  these  enjoyable  goods  form 
the  total  income  of  the  community  was,  in  fact,  the  first 
step  in  the  reasoning.  Hence  everything  that  is  frue  of 
wages  is  true  of  interest,  and  rent,  and  business  profits. 
All  are  derived  from  capital  in  the  same  sense.  Interest 
or  rents  received  some  time  ago  may  have  been  put  into 
durable  forms  of  enjoyable  wealth,  and  may  still  exist,  as 
mansions  or  cottages,  perfect  works  of  art  or  primitive 
ornaments  ;  and  these  things  are  not  capital.  But  the  in- 
terest and  rent  received  from  day  to  day  are  nearly  all 
spent  from  day  to  day,  and  are  spent,  in  the  main,  on 
commodities  which  do  not  reach  the  stage  of  enjoyment 
until  the  purchase  is  accomplished.  In  this  sense  all 
forms  of  present  income  alike,  while  made  up  of  enjoy- 
able goods,  were  capital  but  a  moment  before.  If  any 
law  of  wages  has  been  reached,  it  is  a  law  equally  appli- 
cable to  all  present  rights  and  claims.  It  is  but  a  state- 
ment of  the  fact  that  all  the  enjoyment  of  to-day  comes 
from  commodities  which  are  the  product  of  past  labor, 
and  have  ripened  to-day,  or  yesterday  at  best,  into  the 
finished  form  which  makes  enjoyment  possible. 

Herein,  again,  certainly  we  have  a  conclusion  different 
from  that  of  the  classic  economists.  They  never  dreamed 
of  applying  to  profits  and  to  rent  the  same  reasoning  that 
was  applied  to  wages.  Wages,  according  to  them,  came 
from  a  different  source  and  were  determined  by  different 
causes  from  those  that  affected  the  other  sorts  of  income 
which  are  usually  associated  with  prosperity  and  wealth. 
According  to  the  views  just  developed,  all  alike  come 
from  the  same  source  and  are  determined  bv  a  chain  of 


CAPITAL   AND   WAGES. 


49 


past    events    whose   general    influence    is    the    same   as 
to  all. 

Not  only  are  interest,  rent,  and  wages  to  be  considered 
together  from  this  point  of  view,  but  the  different  sorts  of 
wages  also  go  together.  It  is  immaterial  what  the  ma- 
chinery is  by  which  wages  are  turned  over  to  the  la- 
borer: whether  in  the  first  instance  in  the  form  of  money 
wages  by  an  employer,  or  in  the  form  of  money  received 
directly  by  the  laborer  for  a  product  sold  by  him ;  whether 
daily  wages  to  an  unskilled  workman,  or  a  yearly  salary  to 
a' high  official.  All  get  their  real  wages  from  the  same 
source  and  in  the  same  way,  by  spending  their  money  re- 
ceipts on  consumable  commodities.  This  was,  again,  by 
no  means  the  scope  of  the  older  wages-fund  doctrine, 
which  was  declared  more  or  less  explicitly  to  refer  to  hired 
laborers  only,  and  was  always  stated  and  applied  in  a 
manner  to  show  that,  even  among  these,  only  manual  la- 
borers were  thought  of.  Whether  or  no  the  old  doctrine 
was  meant  by  its  authors  to  be  limited  in  its  scope  to 
hired  laborers,  the  important  truth  which  has  been  set 
forth  as  underlying  it  holds  good  in  the  much  wider  sense 
which  has  been  explained  in  the  preceding  pages.  Past 
product,  existing  for  any  season  mainly  in  the  form  of  un- 
finished goods,  is  the  source  whence  all  laborers,  hired 
or  not  hired,  and  all  capitalists,  and  all  the  members  of 
the  community,  get  the  income  of  the  present  and  of  the 
immediate  future. 

And  yet  there  is  something  more  to  be  said  of  wages 
and  capital,  and  of  laborers,  hired  or  other,  than  this 
general  proposition  as  to  the  source  of  the  whole  com- 
munity's income.  It  is  obvious  at  the  least  that  there  are 
differences  in  the  machinery  by  which  this  income  reaches 
one  hand  and  another.  Hired  laborers  get  the  money 
incomes  which  constitute  their  claims  to  the  accruing  real 
income  of  the  community  in  one  way  ;  independent  work- 


50  WAGES   AND   CAPITAL. 

men  in  another;  rent  receivers  and  interest  receivers  in 
still  another.  The  unmistakable  differences  in  the  mode  in 
which  the  various  members  of  the  social  body  get  their 
share  of  the  general  income  bring  some  important  conse- 
quences, both  as  to  distribution  at  large  and  as  to  wages 
and  the  wages  fund.  The  examination  of  these  differ- 
ences and  the  consequences  which  flow  from  them  will 
form  the  subject  of  the  next  chapter. 


CHAPTER   III. 

THE    MACHINERY    OF    DISTRIBUTION. 

THE  conclusions  reached  in  the  preceding  chapters,  if 
not  of  universal  application,  are  at  least  of  very  wide  ap- 
plication. They  hold  good  of  any  community  which  has 
got  beyond  the  most  primitive  stages  in  the  arts,  and  in 
which  the  development  of  the  arts  has  brought  any  com- 
plicated series  of  productive  acts.  They  would  hold  good 
of  a  socialist  community  as  well  as  of  one  maintaining  the 
regime  of  private  property.  They  are  conclusions  as  to 
real  income  and  real  wages,  which  have  nothing  to  do 
with  the  ownership  of  capital  or  the  inequalities  of  wealth, 
or  with  the  money  incomes  and  money  wages  which  are 
such  important  elements  in  the  existing  machinery  of  dis- 
tribution in  modern  communities. 

In  the  present  chapter  we  have  to  do  with  precisely 
this  machinery.  Here  money  and  money  income  play  a 
vital  part.  Money  wages,  money  interest,  money  rent, 
are  the  only  avenues  to  the  real  income  of  consumable 
commodities.  We  can  make  our  conclusions  concrete, 
can  follow  them  out  in  all  their  ramifications,  only  by  fol- 
lowing the  actual  working  of  the  intricate  money  ma- 
chinery of  exchange  and  distribution.  In  doing  so  we 
shall  find,  as  is  the  case  with  every  investigation  that  goes 
beyond  first  principles,  new  premises,  new  points  of  view, 
new  conclusions. 

For  the  simplification  of  the  inquiry,  let  it  be  assumed 


52  WAGES   AND    CAPITAL. 

at  the  outset  that  the  money  regime  has  reached  its  com- 
plete development;  let  it  be  supposed  that  the  division  of 
labor,  and  its  consequenes  of  exchange,  money,  and  sale, 
have  been  carried  so  far  that  no  one  consumes  any  of  the 
things  he  produces.  Every  article  produced  comes  to 
market  and  is  sold.  This  is  so  largely  the  case  in  the 
advanced  communities  of  modern  times  that  conclusions 
reached  on  the  assumption  of  its  being  universally  the 
case  can  not  diverge  seriously  from  the  truth.  It  follows 
that  the  total  product  or  output  of  the  community  is  sold 
for  money.  It  follows  also  that  all  income  of  every  sort 
appears  first  in  the  form  of  a  money  receipt.  All  real  in- 
come is  thus  derived  from  the  use  of  money  income.  The 
inquiry  as  to  money  income  becomes  an  inquiry  as  to  the 
first  step,  and  a  most  important  step,  toward  the  final  re- 
ceipt of  consumable  goods. 

But  while  real  income  under  these  conditions  is  derived 
only  by  the  expenditure  of  money  income,  the  total  money 
income  of  the  community  is  by  no  means  the  same  as 
the  money  price  of  the  real  income.  This  total  is  much 
greater ;  it  is  the  money  price  of  the  entire  output  of 
the  community.  Real  income  is  the  flow  of  consumable 
goods  which  are  regularly  reaching  completion,  including 
also  a  due  fraction  of  the  value  or  utility  of  the  stores  of 
durable  finished  goods.  The  output  of  the  community, 
while  including  this  real  income,  includes  in  addition  all 
the  inchoate  wealth  or  capital  which  is  being  steadily  pro- 
duced. But  this  clear  distinction  between  output  and  en- 
joyable income  does  not  appear  either  in  the  case  of  the 
individual's  money  income  or  in  that  of  the  community's 
total  money  income.  Here  income  and  output,  in  the  first 
instance  certainly,  run  together.  Whatever  is  produced, 
no  matter  in  what  stage  it  may  be  with  reference  to  the 
final  emergence  of  enjoyable  wealth,  is  sold.  Every  form 
of  output  is  measured  by  its  owner  in  terms  of  money,  and 


THE    MACHINERY   OF    DISTRIBUTION. 


53 


is  reckoned  as  a  receipt.  The  gross  money  income  of  all 
the  individuals  in  the  community  is  thus  the  money  yield 
of  the  total  output.  Each  producer's  net  money  income 
is  some  part,  possibly  the  whole,  of  the  receipts  from  the 
things  he  happens  to  make  and  sell,  irrespective  whether 
those  things  do  or  do  not  belong  to  the  real  net  income  of 
the  community. 

Let  us  now  suppose  a  simple  case,  perhaps  never  to  be 
seen  in  the  actual  world,  yet  largely  typical  of  what  goes 
on  in  it,  and  at  all  events  serviceable  as  a  first  step  toward 
understanding  its  complexities.  Suppose  a  capitalist,  ac- 
tive in  the  conduct  and  management  of  a  productive  enter- 
prise, to  own  all  of  his  plant,  and  to  start  at  the  outset 
with  funds  sufficient  to  pay  all  laborers  and  buy  all  ma- 
terials until  sales  are  made.  Such  a  capitalist  buys  for 
cash  and  sells  for  cash,  pays  laborers  out  of  funds  in  his 
own  possession,  and  has  his  assets  always  under  complete 
and  ready  control.  His  product,  whatever  it  be,  whether 
an  article  nearer  or  farther  removed  from  completion  so 
far  as  the  community's  real  income  is  concerned,  yields  him 
an  available  income  as  soon  as  sold. 

That  income  he  is  free  to  spend  as  he  pleases.  He 
may  spend  the  whole  of  it  for  his  own  immediate  pleasure ; 
he  may  reinvest  the  whole  of  it,  or,  rather,  may  reinvest 
everything  over  and  above  what  is  necessary  for  his  sup- 
port and  the  support  of  those  whom  he  cherishes  as  part  of 
himself.  If  he  reinvests,  he  devotes  this  gross  money  in- 
come to  the  purchase  of  more  materials,  the  enlargement 
of  plant,  or  the  payment  of  more  laborers.  If  he  spends, 
he  devotes  it  to  the  purchase  of  real  income,  of  enjoyable 
wealth,  for  himself  and  those  dependent  on  him.  The 
mode  in  which  he  shall  apportion  his  money  income  be- 
tween these  different  objects  is  a  matter  at  his  discretion. 

We  should  not  usually  think  of  such  a  person  as  unfet- 
tered, or  as  free  to  spend  for  immediate  enjoyment  as 


54 


WAGES  AND  CAPITAL. 


much  or  as  little  as  he  pleased  of  his  money  receipts.  We 
think  of  him  as  committed  to  maintain  his  capital  intact. 
Even  if  he  has  not  borrowed,  and  so  is  under  no  obliga- 
tions to  provide  out  of  his  receipts  for  principal  and  in- 
terest of  a  debt,  he  is  expected  to  keep  his  own  principal 
unimpaired.  The  habit  of  maintaining  accumulations  in- 
tact is  so  strong  in  the  social  strata  to  which  the  managers 
of  business  belong,  that  we  forget  that  it  rests  on  the 
steady  and  recurrent  exercise  of  a  choice.  The  capitalist 
would  ordinarily  set  aside  out  of  current  receipts  enough 
to  replace  the  funds  which  he  has  spent  for  wages  and 
supplies,  and  to  repair  his  plant  or  accumulate  in  due  time 
enough  to  replace  the  plant  when  it  had  worn  out.  Only 
the  excess  over  what  is  needed  to  maintain  the  principal 
intact  is  thought  of  as  free  income,  available  for  expendi- 
ture on  enjoyable  things.  In  reality,  however,  it  is  all 
free.  The  fact  that  a  choice  is  usually  exercised  in  a  par- 
ticular way  does  not  prove  that  no  choice  exists.  If  the 
man  is  not  prosperous  for  a  season,  he  may  very  likely 
fail  to  keep  up  his  plant  or  to  replace  in  full  his  working 
capital,  trusting  that  better  times  will  come.  He  then  ex- 
ercises his  freedom  in  such  a  way  as  to  trench  on  his  capi- 
tal and  get  a  share  of  the  community's  real  net  income, 
even  though  he  has  secured  no  net  income  in  the  sense  in 
which  that  term  is  used  with  regard  to  an  individual.  On 
the  other  hand,  if  he  has  been  prosperous,  he  may  add  to 
his  capital,  and  spend  for  the  necessaries  and  luxuries  of 
life  less  than  his  private  net  income  would  bring  within 
the  bounds  of  prudence.  On  the  average,  the  latter  is  the 
typical  case.  As  a  class,  the  active  men  of  affairs  get  as 
net  income  more  than  they  spend  for  enjoyable  wealth. 
They  exercise  their  freedom  in  such  manner  as  to  add  to 
capital,  or,  in  the  everyday  phrase,  make  money  :  a  fact 
which  is  of  no  small  importance  in  the  working  of  the 
machinery  of  distribution. 


THE    MACHINERY   OF   DISTRIBUTION. 


55 


Let  us  now  stretch  still  further  this  supposition  of  sim- 
ple conditions.  Let  it  be  assumed  that  all  the  capitalists 
of  the  community  are  of  the  sort  just  described:  that 
there  are  no  idle  investors,  no  bankers  or  other  lenders, 
and  that  all  buying  and  selling  are  for  cash.  Every  ac- 
tive producer  owns  his  own  plant  and  materials,  and  every 
shopkeeper  and  every  merchant  his  stock.  All  these  per- 
sons collectively  own  the  capital  of  the  community:  that 
is,  the  real  capital  of  the  community,  the  inchoate  wealth 
which  is  to  be  advanced  by  successive  stages  to  fruition. 
Further,  let  it  be  assumed  that  all  laborers  are  hired  by 
these  capitalists.  None  work  on  their  own  account,  or 
sell  anything  but  their  labor.  None  own  capital,  or  have 
any  source  of  present  income,  beyond  pay  for  the  labor  of 
the  day.  They  may  have  some  accumulations  in  present 
enjoyable  form,  such  as  houses,  furniture,  and  food  in  the 
closet ;  but  these  must  have  been  derived  from  income  of 
the  past.  Their  income  for  present  work  comes  exclu- 
sively as  pay  from  the  capitalists.  The  older  English 
writers  constantly  assumed,  by  implication  if  not  explicit- 
ly, that  such  was  the  situation  of  all  laborers.  The  as- 
sumption may  be  used  advantageously  as  a  point  of  de- 
parture in  reasoning  about  the  social  conditions  of  modern 
times,  if  only  it  be  not  forgotten  that  the  complications  of 
real  life  and  their  divergence  from  the  simple  assumed  con- 
ditions must  receive  in  due  course  a  careful  consideration. 

In  such  a  society,  then,  the  total  money  income  would 
flow  in  the  first  instance  entirely  into  the  hands  of  the 
capitalist  managers.  All  things  produced,  whether  real 
capital  or  real  income  for  the  community,  would  be  their 
property.  Under  a  completely  developed  division  of  labor, 
all  things  produced  are  sold;  and  the  money  yield  of  all 
the  output  would  be  the  gross  income  of  the  capitalists. 
That  income  they  can  use  as  they  please.  They  may 
spend  it  all  for  themselves,  or  invest  it  all.  They  may 


56  WAGES   AND   CAPITAL. 

spend  only  their  net  income,  i.  e.,  the  excess  over  what 
they  must  use  to  keep  intact  their  capital  (and  so  the 
community's  capital)  ;  or  may  spend  less  than  their  net 
income,  and  so  cause  capital  to  be  added  to. 

The  laborers,  on  the  other  hand,  would  be  dependent 
for  their  present  income  on  the  manner  in  which  the 
capitalists  chose  to  spend  their  gross  income.  If  the  cap- 
italists were  frugal,  spent  little  for  personal  pleasure,  and 
added  much  to  their  accumulations,  then  more  money 
income  would  go  to  the  purchase  of  plant  and  materi- 
als, and  more  to  the  hire  of  laborers.  If  they  chose  to 
spend  much  for  present  enjoyment,  less  money  income 
would  go  to  the  laborers.  There  is,  indeed,  a  case,  of 
no  small  importance  in  actual  life,  in  which  it  would  be 
immaterial  to  the  laborer,  at  least  for  the  time  being, 
whether  the  capitalists  turned  their  income  to  enjoyment 
or  to  investment.  This  is  where  the  enjoyment  of  the 
capitalists  takes  the  form  of  abundance  of  personal  serv- 
ice :  where  they  take  their  pleasure  not  in  food,  clothes, 
and  adornments,  but  in  footmen  and  maids.  Here  the 
alternative  is  not  whether  more  shall  be  spent  on  goods 
and  less  turned  over  to  laborers  as  wages,  but  whether 
wages  shall  be  paid  for  one  sort  of  work  or  another.  The 
tendency  in  modern  times,  however,  is  for  luxurious  ex- 
penditure to  take  the  form  of  personal  service  less  and 
less.  In  the  main,  an  increase  of  expenditure  for  enjoy- 
ment means  proximately  that  a  smaller  part  of  money 
income  is  turned  over  to  laborers;  while  an  increase  of 
investment  and  a  disposition  to  add  to  capital  mean  that 
more  is  turned  over  to  them.  At  all  events,  what  the 
laborers  get  under  the  conditions  here  assumed  would 
be  determined  by  the  use  which  the  capitalists  made  of 
the  money  income.* 


THE    MACHINERY   OF    DISTRIBUTION. 


57 


It  will  be  observed  that  money  income  alone  has  so 
far  been  spoken  of.  That  money  income,  to  serve  its  real 
end  for  laborers  or  capitalists,  must  be  spent  on  com- 
modities. But  if  we  examine  in  what  manner  capitalists 
can  spend  the  gross  income  which  has  just  been  described 
as  freely  disposable  by  them,  important  limitations  to  the 
conclusions  just  stated  appear. 

Real  income,  to  repeat,  is  enjoyable  commodities;  and 
if  the  capitalists  wish  to  enjoy,  they  must  buy  the  finished 
goods  which  alone  constitute  the  real  income  of  the  com- 
munity.* The  quantity  of  such  real  income  existing  at 
any  time  is  limited;  for  the  moment  it  consists  of  the 
finished  goods  now  purchasable.  For  the  season,  it  con- 
sists of  such  supplies  of  partly  finished  goods  as  can  be 
got  to  the  stage  of  completion  within  the  season.  It  is 
limited  by  the  quantity  of  materials,  worked  up  in  part 
or  in  whole,  which  may  be  on  hand,  and  by  the  tools  and 
machinery  existing  wherewith  to  carry  on  operations_ 
The  total  real  income  available  in  any  season  is  obviously 
less  than  the  output  of  that  season.  In  a  community 
which  has  reached  a  high  stage  of  industrial  organization, 
which  has  spread  the  operations  of  production  over  a 
considerable  stretch  of  time,  and  in  which  a  large  part  of 
labor  is  steadily  given  to  the  earlier  stages  of  produc- 
tion, the  output  is  very  much  larger  than  the  real  income. 

first  stage,  the  change  from  investment  to  enjoyment  means  simply  that 
laborers  are  employed  in  one  way  rather  than  another.  The  later  effect 
is  on  real  income  :  laborers  make  commodities  for  the  enjoyment  of  the 
potential  capitalists,  rather  than  for  the  enjoyment  of  other  laborers. 

*  Strictly,  an  expenditure  on  servants  would  need  to  be  considered, 
this  being  a  case  where  immediate  satisfaction  and  immediate  real  income 
are  secured.  It  is  a  case  in  which  the  quantity  of  real  income  available 
for  the  well-to-do  happens  to  be  peculiarly  elastic,  and  forms  an  excep- 
tion to  the  general  reasoning  of  the  text.  Quantitatively,  the  exception 
is  in  modern  times  probably  of  no  great  importance. 


58  WAGES   AND   CAPITAL. 

But  the  total  money  value  of  the  output  is  the  total 
money  income  of  the  capitalist,  in  the  case  now  assumed. 
The  real  income  which  they  can  buy  is  therefore,  in  its 
normal  money  value,  very  much  less  than  that  total  in- 
come which  has  been  described  as  freely  disposable  by 
them.  Even  the  whole  of  the  real  income  available  for 
the  community  is  not,  in  any  substantial  sense,  at  the  dis- 
posal of  the  capitalists.  They  can  get  enjoyment  only 
from  finished  commodities  of  the  kind  and  in  the  variety 
that  their  tastes  and  needs  call  for.  A  large  part  of  the 
commodities  now  on  hand  would  not  serve  their  turn. 
The  supply  of  bread  and  flour  and  grain  at  any  moment 
is  adjusted  to  the  expected  needs  of  the  whole  mass  of 
consumers;  and  after  our  capitalists  had  had  their  fill, 
the  rest  of  the  breadstuffs  would  be  virtually  incapable  of 
giving  them  any  satisfaction.  Other  commodities  would 
be  too  coarse  for  their  tastes,  or  would  pall  long  before 
the  total  available  quantity  was  used.  The  effective 
choice  which  the  capitalists  would  have  as  to  the  disposal 
of  the  gross  money  income  which  was  freely  theirs,  would 
then  be  confined,  for  the  time  being  at  least,  within  lim- 
its not  very  elastic. 

Limitations  of  the  same  sort  appear  as  to  the  real 
wages  and  real  income  of  the  laborers.  Like  the  capi- 
talists, they  can  get  for  the  money  turned  over  to  them 
only  such  consumable  commodities  as  exist  or  will  be 
ready  within  the  season.  We  may  suppose,  for  example, 
that  the  capitalists  have  been  moved  to  abstain  from  per- 
sonal expenditure,  and  have  reinvested  largely  and  heav- 
ily, the  process  involving  a  transfer  of  an  increased  part 
of  their  money  income  to  the  hired  laborers  ;  or  we  may 
suppose — to  put  a  case  that  has  played  no  small  part  in 
the  history  of  the  wages  controversy — that  a  general  trades 
union  of  all  the  laborers  has  put  the  capitalists  in  a  posi- 
tion where,  under  pain  of  ceasing  investment  entirely,  they 


THE    MACHINERY   OF   DISTRIBUTION. 


59 


must  raise  money  wages.  Whatever  the  ultimate  outcome 
in  this  much-debated  case,  it  may  be  averred  without  hesi- 
tation that  the  laborers'  combination  might  win  a  vic- 
tory in  the  first  step  in  ,their  campaign, — the  advance. of 
money  wages.  That  step  is  the  only  one  of  which  labor- 
ers or  capitalists  usually  think,  and,  it  must  be  confessed, 
is  the  step  with  which  alone  economists  have  too  often 
busied  themselves.  But  the  real  gain  (apart  from  the  joy 
of  victory)  for  the  laborers  must  come  in  the  purchase  of 
more  commodities  in  the  way  of  food,  drink,  clothes,  shel- 
ter ;  and  of  these  no  more  can  be  bought  than  there  are. 
How  elastic  the  inflowing  supply  of  such  commodities  is 
for  any  season,  how  great  and  rigid  are  the  obstacles  to 
an  immediate  or  rapid  change  in  the  available  real  wages, 
we  need  not  yet  discuss.  What  is  plain  is  the  existence  of 
some  limits  in  the  nature  of  the  available  supplies  of  fin- 
ished and  half-finished  goods.  The  capitalists,  in  the  case 
supposed,  can  turn  the  money  income  in  any  direction 
they  please  :  keep  it  all  for  themselves,  or  turn  more  or 
less  of  it  over  to  laborers;  but  the  real  income  which  can 
be  secured  and  enjoyed  is  in  some  degree  predetermined 
in  quantity  and  quality. 

All  this  means  simply  that  the  machinery  of  produc- 
tion at  any  given  time  is  arranged  for  the  supply  of  the 
habitual  and  anticipated  wants  of  the  community.  Each 
individual  capitalist  produces  the  commodities  which  he 
has  sold  before,  and  which  experience  leads  him  to  expect 
to  sell  again.  The  pig-iron  maker  has  a  reasonable  faith 
that  his  iron  will  be  bought  by  the  maker  of  machinery, 
and  he  again  that  his  machinery  will  be  bought  by  the  per- 
son who  means  to  use  it  in  making  one  product  or  another. 
That  process  of  investment  and  accumulation  by  which 
existing  capital  is  maintained  and  new  capital  is  added,  is 
thus  prepared  for  and  virtually  accomplished  before  the 
individuals  commit  themselves  to  the  decisive  step  of 


60  WAGES   AND   CAPITAL. 

turning  their  money  income  to  investment  rather  than  to 
enjoyment.  The  producers  of  luxuries  go  their  way  in 
the  same  fashion.  Some  create  or  maintain  machinery  for 
silks  and  satins,  others  prepare  the  raw  material,  others 
finally  buy  the  products  from  the  manufacturer  and  ar- 
range them  in  the  shops  of  the  cities  for  the  expected 
purchases  of  the  consumers,  who  will  presumably  do  as 
they  have  done  in  times  past, — spend  part  of  their  inflow- 
ing money  receipts  for  enjoyment.  Not  least,  the  mak- 
ers of  the  commodities  for  laborers  continue  to  produce 
these  on  the  accustomed  scale,  anticipating  the  transfer- 
ence of  money  income  by  capitalists  to  laborers  in  the 
course  of  that  continuance  of  investment  of  which  the 
purchase  of  machinery  and  materials  is  the  other  part. 
The  output  of  the  season,  produced  and  owned  under  our 
supposition  by  the  capitalists  as  a  body,  is  sold  again  to 
these  capitalists  as  a  body.  They  own  the  whole  output 
at  the  start,  and  get  the  whole  money  income.  A  part  of 
the  output  they  buy  directly,  either  as  plant  and  materials 
for  further  production  or  as  commodities  for  enjoyment ; 
a  part  is  sold  to  them  indirectly  through  their  transference 
of  money  income  to  the  hired  laborers.  But  the  assort- 
ment of  goods,  finished  and  unfinished,  that  is  on  hand  at 
any  time  depends,  not  on  the  apportionment  of  their 
money  income  which  is  then  made  by  the  capitalists  as 
spenders,  but  on  the  apportionment  which  these  same  cap- 
italists as  producers  have  been  expecting  and  planning 
for  during  a  considerable  stretch  of  time  in  the  past. 

So  much  as  to  the  nature  and  the  causes  of  the  limita- 
tions by  which  the  capitalists  would  find  themselves  fet- 
tered during  any  one  season  in  the  really  free  disposal  of 
their  incomes.  Over  a  longer  stretch  of  time  the  case 
would  be  different.  Here  their  choice  would  be  effective 
not  only  as  to  the  disposal  of  money  income,  but  of  real 
output  and  real  income  as  well. 


THE    MACHINERY    OF    DISTRIBUTION.  6l 

The  steps  by  which  this  real  control  over  the  product 
and  the  income  of  the  community  would  be  exercised 
need  no  elaborate  explanation.  Assume  that  there  is  a 
sudden  change  in  the  manner  in  which  the  capitalists 
choose  to  use  their  money  income;  for  example,  that 
they  become  more  frugal  and  more  disposed  to  invest. 
Less  of  luxuries  and  comforts  will  be  bought  by  them ; 
the  merchants  who  deal  in  such  commodities  will  find 
trade  dull ;  the  series  of  producers  who  make  them  will  in 
turn  feel  the  depression.  Eventually  less  will  be  made, 
and  the  constitution  of  the  real  income  of  the  community 
will  in  time  conform  to  the  new  apportionment  of  the 
money  incomes  of  the  capitalists.  On  the  other  hand,  the 
money  formerly  spent  on  the  luxuries  and  comforts  will 
be  turned  in  other  directions.  The  makers  of  machines 
and  materials  will  find  a  brisker  demand  for  their  prod- 
ucts. More  money  income  will  be  turned  over  to  labor- 
ers, and  the  makers  of  the  commodities  consumed  by  them 
will  similarly  find  trade  good  and  profits  "satisfactory." 
A  shift  will  eventually  take  place  in  the  direction  in  which 
the  productive  apparatus  of  the  community  is  turned.  In 
the  long  run  it  is  thus  true  that  not  only  the  money  in- 
come of  the  community  is  freely  at  the  disposal  of  the 
active  capitalists,  but  that  its  real  income  and  its  real  out- 
put exist  in  such  forms  and  in  such  apportionment  as  their 
choice  determines.  Allowing  for  the  time  needed  to  en- 
able the  productive  apparatus  to  accommodate  itself  to 
demand,  we  shall  find  so  much  real  income  for  capitalists 
and  laborers,  and  inchoate  wealth  in  such  quantity  and 
variety,  as  the  capitalists'  use  of  the  total  money  income 
calls  for. 

Before  going  on  to  the  next  stage  in  the  analysis 
of  the  machinery  of  distribution,  one  corollary  from  the 
preceding  proposition  may  be  noted.  It  is  true  that  the 
supposed  simple  community  of  completely  independent 


62  WAGES   AND   CAPITAL. 

employing  capitalists  and  completely  dependent  hired 
laborers  is  still  under  consideration  here.  As  to  the  com- 
plex phenomena  of  the  actual  world,  we  shall  find  here- 
after occasion  for  much  qualification  of  the  preliminary 
results.  But  one  part  of  the  conclusions  holds  good  for 
any  community  in  which  the  institution  of  private  prop- 
erty exists :  it  is,  that  the  maintenance  and  accumulation 
of  capital  depend  on  the  disposition  and  the  will  of  those 
who  become  recurrently  the  owners  of  the  money  income 
and  so  of  the  real  output  of  the  community.  This  was 
what  the  old  economists  had  in  mind  when  they  said  that 
it  depended  on  the  will  of  the  owner  whether  a  commodity 
should  be  capital  or  not  capital.  They  sometimes  spoke 
as  if  his  will  could  become  operative  at  once  ;  as  if  by 
magic  he  could  convert  a  pack  of  hounds  into  a  cotton 
mill.  But  the  truth  which  underlay  their  dissertations  on 
this  topic  is  an  important  and  solid  one.  In  every  com- 
munity in  which  private  property  exists  there  are  inequali- 
ties in  wealth ;  in  almost  all,  great  inequalities.  The 
money  income  of  every  season  flows  first,  in  very  large 
part,  into  a  comparatively  few  hands,  and  is  directed  by 
them  at  their  discretion  into  one  channel  of  purchase  or 
another.  The  inequality  in  possessions  may  be  regret- 
table, and  the  stewardship  which  it  involves  of  the  com- 
munity's capital  may  be  well  or  ill  administered  ;  but  the 
facts  are  not  to  be  gainsaid,  and  must  be  faced  if  we 
would  get  a  true  understanding  of  the  industrial  world. 
The  importance  of  this  force,  as  of  others  that  are  con- 
stant and  familiar  in  their  operation,  is  often  forgotten. 
The  recurrent  exercise  of  the  choice  of  the  capitalist 
takes  place  habitually  in  much  the  same  way  :  changes 
in  the  direction  of  greater  or  less  expenditure,  or  greater 
or  less  (usually  greater)  accumulation,  come  slowly  and 
gradually.  The  motive  power  which  thus  drives  and  con- 
trols the  apparatus  of  capitalistic  production  works  in  the 


THE    MACHINERY   OF    DISTRIBUTION.  63 

main  so  steadily  that  we  forget  that  it  consists  of  the  col- 
lected volition  of  hosts  of  individuals,  each  and  all  of 
whom  are  free  to  do  as  they  will  with  their  own. 

We  may  now  proceed  to  make  our  conclusions  fit  more 
closely  to  the  facts  of  real  life,  by  introducing,  step  by 
step,  the  complications  which  appear  in  the  actual  organi- 
zation of  the  machinery  of  production  and  distribution. 

In  the  first  place,  no  active  capitalist  is  in  that  position 
of  complete  independence  which  has  been  assumed :  of 
neither  borrowing  nor  lending,  of  buying  for  cash  and 
selling  for  cash.  He  buys  on  credit,  and  thus  is  under 
obligations  to  turn  over  part  of  his  money  income,  as  it 
flows  in,  to  his  creditors ;  while  those  to  whom  he  has 
sold  on  credit  are  under  similar  obligations  to  him.  As 
between  the  direct  managers  of  industry,  the  obligations 
which  thus  follow  each  one  do  not  change  the  case  for 
the  mass.  Collectively,  they  are  still  free  and  uncon- 
trolled as  to  the  disposal  of  the  general  money  income. 
But  quite  as  important  as  their  relations  inter  se,  are  their 
relations  to  the  great  body  of  bankers,  brokers,  money- 
lenders, middlemen  of  all  sorts  and  degrees,  whose  busi- 
ness it  is  to  make  advances  to  the  more  immediate  direct- 
ors of  business  affairs.  The  banks  of  discount  and 
deposit  find  their  chief  function  in  such  advances,  and 
are  the  great  types  of  this  factor  in  the  industrial  world. 
Side  by  side  with  them  are  to  be  found,  in  every  consid- 
erable centre,  other  parts  of  the  same  credit  organization. 
Brokers  negotiate  loans  whenever  they  find  funds  offering 
for  investment  over  those  short  periods  for  which  the 
regularly  recurring  debts  of  the  business  manager  are 
contracted.  The  great  wholesale  houses  play  a  most  im- 
portant and  effective  part.  They  buy  on  credit,  make  ad- 
vances on  consignments,  nurse  this  producer  and  drive 
that  one  to  the  wall  ;  they  themselves  meanwhile  borrow 
largely  from  the  banks.  Their  action  goes  far  in  settling 
6 


64  WAGES   AND   CAPITAL. 

when  and  how  and  where  money  income  shall  flow  into 
the  hands  of  those  who  are  in  the  more  direct  and  obvious 
sense  the  directors  of  production  and  the  employers  of 
labor.  In  other  words,  the  body  of  persons  whose  judg- 
ment and  discretion  determine  how  the  gross  money  in- 
come shall  be  used,  and  what  part  of  it  shall  be  turned 
over  to  laborers,  is  much  larger  than  the  group  of  the 
immediate  employers.  In  the  discussion  of  the  wages- 
fund  doctrine,  and  indeed  in  most  academic  disquisitions 
on  wages  and  business  management,  this  has  been  often 
lost  sight  of.  The  immediate  employers  are  thought  of 
as  the  only  persons  who  decide  primarily  how  and  where 
laborers  shall  be  hired,  and  whose  resources  determine 
what  direct  advances  of  wages  shall  be  made  them.  In 
fact,  the  immediate  employer  is  controlled,  in  greater  or 
less  degree,  by  his  relations  with  this  large  and  complex 
body  of  lenders  and  of  middlemen.  He  can  sell  rapidly 
to  the  merchants  who  are  his  first  customers,  if  their 
judgment  approves  of  his  wares,  and  he  can  get  advances 
from  them  if  they  have  faith  in  his  capacity  and  integrity. 
Similarly,  he  can  borrow  from  the  bankers  and  brokers 
according  to  his  repute  for  success  and  character.  If  a 
long  career  of  successful  ventures  and  of  punctual  probity 
has- given  him  not  only  large  means  of  his  own,  but  a  high 
standing  in  the  business  world,  his  immediate  resources 
are  almost  limitless;  he  can  secure  at  a  moment's  notice 
the  command  of  millions.  On  the  other  hand,  a  rumor  of 
disaster,  a  revelation  of  dishonesty,  may  practically  wipe 
out  his  means. 

Thus  we  must  consider  the  resources  of  a  large  and 
varied  body  of  persons,  if  we  would  examine  the  im- 
mediate source  of  the  money  wages  of  hired  laborers. 
Such  an  examination  at  best  is  incomplete  ;  the  inquiry  as 
to  the  source  of  real  wages  remains  the  important  one  in 
the  background.  But  the  questions  as  to  the  machinery 


THE    MACHINERY   OF    DISTRIBUTION.  65 

of  immediate  money  wages  are  important  enough  ;  and, 
to  repeat,  they  are  to  be  answered  only  by  examining  the 
doings  of  the  whole  array  of  employers  and  middlemen 
and  lenders  who  collectively  form  the  active  managers  of 
industry.  In  recent  discussions  as  to  the  source  of  wages, 
it  has  been  asked  not  infrequently  whether  the  funds  of 
the  immediate  employers,  available  for  paying  money 
wages,  are  predetermined  or  limited.  If  any  question  of 
this  sort  is  to  be  raised,  it  should  be,  not  whether  the 
funds  or  means  at  die  disposal  of  the  individual  employer, 
but  whether  those  of  the  whole  complex  body,  are  limited. 
The  answer  will  be  considered  in  the  next  chapter:  it  may 
be  said  at  once  that  the  degree  of  elasticity  and  indeter- 
minateness  is  much  greater  for  the  individual  member 
than  for  the  whole  group.  However  this  may  be,  it  is 
clear  that  the  control  of  the  total  output  of  society,  and 
so  of  its  gross  money  income,  which  was  assumed  at  the 
outset  to  be  entirely  in  the  hands  of  the  immediate  pro- 
ducers and  employers,  is  exercised  in  reality  by  a  much 
larger  and  more  varied  body. 

Next  we  have  to  consider  another  difference  between 
the  real  world  and  assumed  conditions — one  of  far-reaching 
importance  for  many  questions  of  social  organization,  but 
less  important  for  those  here  under  review.  The  employ- 
ing capitalists, — we  may  now  mean  by  that  phrase  the 
complex  body  which  directly  or  indirectly  is  active  in 
business  management, — were  supposed  to  own  all  the  capi- 
tal. But  in  fact  we  find,  separate  from  them  in  the  main, 
a  great  number  of  investors,  who  own  capital  and  derive 
an  income  from  it,  but  take  no  direct  part  in  its  manage- 
ment. 

The  investors  have  made  loans  to  the  active  business 
men.  They  have  received  an  engagement  for  the  payment 
of  interest  at  stated  terms,  and  for  the  eventual  repay- 
ment of  the  principal.  They  may  be  conceived,  for  many 


66  WAGES   AND   CAPITAL. 

social  purposes,  as  the  owners  of  a  great  part  of  the  com- 
munity's capital.  When  a  plant  is  erected  with  borrowed 
capital,  the  lender  is  in  so  far  virtually  its  owner.  While 
legally  but  a  creditor,  in  the  eye  of  the  economist  he  may 
often  be  regarded  as  an  owner  of  real  capital.  As  it  hap- 
pens, however,  the  legal  relation  fits  exactly  the  economic 
relation,  for  the  purposes  of  the  present  inquiry  into  the 
working  of  the  machinery  of  distribution.  If  it  is  asked, 
who,  in  the  end,  owns  the  capital  of  the  community  ?  the 
answer  must  be,  the  idle  investor  as  well  as  the  active 
business  manager.  But  if  it  is  asked,  who  controls  the 
capital  of  the  community  and  first  becomes  owner  of  its 
total  income  ?  the  answer  must  be,  the  active  manager, 
indebted  though  he  may  be  to  his  creditor.  The  output 
became  his  as  it  goes  to  market  and  is  sold,  and  the  gross 
money  income  passes  first  into  his  hands.  He  must  simply 
pay  the  stipulated  interest  to  his  creditor.  In  so  far  only 
is  he  subject  to  a  direct  and  immediate  limitation  in  his 
control  of  the  inflowing  money  receipts.* 

It  may  be  suggested  that  the  business  man  is  subject 
to  a  further  important  limitation  in  that  he  must  repay  the 
principal  when  due.  But  while  this  is  clearly  the  case  so 
far  as  the  individual  is  concerned,  it  is  not  the  case  for  the 
whole  body  of  active  managers.  Investors  usually  spend 
for  enjoyment  only  their  income,  not  their  principal.  The 
principal,  as  it  falls  in,  is  reinvested — that  is,  the  funds  are 


*  Investments  of  what  may  be  called  the  "  productive "  sort  are 
chiefly  referred  to  in  the  text.  Those  large  loans  which  are  made  to 
states  present,  in  the  main,  a  different  chain  of  phenomena.  The  money 
income  is  here  promised  the  investor  by  a  public:  body,  which  in  turn 
gets  its  funds  by  taxes  ;  these  funds  being  again  derived,  if  the  taxes  are 
indirect,  chiefly  from  the  money  receipts  of  the  active  capitalists,  and,  if 
the  taxes  are  direct,  from  any  and  every  source  of  money  income.  Where 
the  proceeds  of  the  loan  are  used  for  public  works  yielding  an  immediate 
money  revenue,  the  situation  is  more  like  that  described  in  the  text. 


THE    MACHINERY   OF    DISTRIBUTION. 


67 


turned  back  into  the  hands  of  one  or  another  active  capi- 
talist, to  be  again  at  his  free  disposal.  Substantially,  there- 
fore, it  remains  true  that  the  existence  of  a  separate  class 
of  investors  affects  our  supposed  case  only  in  one  point — 
the  money  income  which  the  capitalists  get  is  not  wholly 
at  their  disposal,  but  is  subject  to  periodic  drafts  for  inter- 
est payments  to  investors. 

It  may  not  be  amiss  to  refer  for  a  moment  to  the  mode 
in  which  the  operations  of  the  investors  are  connected 
with  that  determination  of  capital  through  the  choice  of 
its  owners,  which  was  the  subject  of  some  of  the  preceding 
paragraphs.  At  any  moment  the  investors  have  put  their 
principal  beyond  control  ;  it  has  been  turned  over  to  the 
active  capitalists,  who  have  spent  it  for  plant  and  mate- 
rials or  have  paid  it  out  in  wages.*  Usually,  funds  bor- 
rowed for  a  considerable  time  from  investors  are  spent  for 
plant  and  other  durable  forms  of  capital,  while  loans  for 
purchase  of  materials  and  for  wages  payments  are  obtained 
from  the  bankers  and  other  middlemen  who  are  the  active 
co-operators  in  business  management.  The  plant  lasts  a 
long  space;  the  investors  have  put  their  means  beyond 
control.  This  irrevocable  commitment  of  the  investor's 
means  finds  its  other  side  in  the  irrevocable  commitment 
of  part  of  the  community's  gross  income  to  the  form  of 


*  The  reader  conversant  with  economic  theory  will  readily  carry  the 
reasoning  here  in  another  direction,  and  will  remark  that  ultimately  all 
the  funds  are  found  to  have  been  directed  to  hiring  laborers.  Tools  and 
materials  are  made  by  labor,  and  (under  the  supposition  that  laborers 
are  hired)  represent  in  the  end  nothing  but  advances  to  laborers.  This 
point  of  view  is  the  one  to  be  taken  if  we  were  to  consider  the  whole 
series  of  operations  which  intervene  between  the  beginning  and  end  of 
production.  For  the  inquiry  carried  on  in  the  text,  however,  the  opera- 
tions of  a  single  season  only  are  pertinent  ;  and  for  a  season  the  funds 
turned  to  hiring  laborers  should  be  treated  as  entirely  separate  from 
those  turned  to  the  purchase  of  tools  and  materials. 


68  WAGES   AND   CAPITAL. 

capital.  As  time  goes  on,  the  plant  wears  out  and  is  re- 
newed, the  loan  falls  due,  and  the  principal  is  reinvested. 
These  two  operations  go  on  side  by  side;  not  in  the  sense 
that  the  renewal  of  actual  capital  and  the  reinvestment  of 
investors'  funds  coincide  in  individual  cases,  but  in  the 
sense  that,  for  the  community  at  large,  they  form  two 
aspects  of  the  one  process  by  which  capital  is  maintained. 
Here  again  the  actual  making  of  concrete  capital, — of 
buildings,  machines,  apparatus,  materials, — does  not  take 
place  as  the  direct  consequence  of  the  investor's  decision 
to  keep  his  principal  intact.  It  precedes  the  decision,  or 
takes  place  pari  passu  with  it,  in  anticipation  of  that  ha- 
bitual reinvestment  which  goes  on  as  a  matter  of  course 
in  modern  communities.  Like  other  habits,  it  rests  on 
the  repeated  exercise  of  volition  in  the  same  direction  ;  the 
effect,  while  almost  invariable,  being  none  the  less  caused 
by  the  exercise  of  a  choice  which,  time  enough  being  given, 
is  unfettered. 

What  has  been  said  of  interest  payments  holds  good  of 
rent  payments.  Important  and  fundamental  as  is  the  dif- 
ference between  interest  and  rent,  the  machinery  by  which 
they  reach  the  hands  of  their  owners  is  the  same.  If  the 
business  man  uses  for  his  operations  a  site  which  enables 
him  to  achieve  a  given  result  with  less  outlay  than  his 
competitors,  he  will  pay  the  price  of  the  advantage  to  the 
fortunate  owner  of  the  site,  in  the  same  manner  as  he 
would  pay  interest  on  borrowed  capital  If  he  happens  to 
own  the  site,  the  inflowing  receipts  are  so  much  the  more 
completely  under  his  control;  precisely  as,  if  he  owns  all 
his  capital,  he  is  not  fettered  in  his  expenditure  of  the  gross 
receipts  by  the  obligation  to  pay  interest.  In  neither  case 
is  there  a  distinguishable  part  of  the  total  income,  appear- 
ing at  the  outset  as  separable  interest  or  separable  rent. 
Both  represent,  so  far  as  they  are  distinct  payments  at  all, 
obligations  which  the  active  business  manager  has  incurred 


THE    MACHINERY   OF    DISTRIBUTION.  69 

for  a  specified  diversion  of  a  part  of  his  total  money  income. 
They  are  independent  of  what  may  in  fact  be  received  by 
him  in  consequence  of  his  possession  of  the  capital  or  the 
site  ;  they  are  often  different  from  that  usual  or  "  normal  " 
gain  accruing  from  their  use,  which  economists  call  true 
interest  or  true  rent.  They  are  simply  money  payments 
which  the  business  man  has  promised  to  make  out  of  the 
general  inflow  of  his  income. 

The  reader  will  readily  follow  the  same  line  of  reason- 
ing in  other  directions — to  monopoly  receipts,  royalty 
payments,  and  other  sources  from  which  the  idle  well-to- 
do  and  the  prosperous  business  men  get  accretions  of  in- 
come. So  far  as  the  business  man  is  owner,  he  gets  in 
these  ways  additions  to  his  unfettered  means  ;  so  far  as  he 
has  borrowed,  he  has  undertaken  stipulated  payments  to 
others.  The  business  corporation  of  modern  times  pre- 
sents all  possible  varieties  of  the  relation  between  active 
manager  and  idle  investor.  Nominally,  the  stockholders 
are  a  group  of  associated  active  capitalists.  Practically, 
they  range  from  shrewd  managers  to  the  most  helpless  of 
inactive  investors.  Throughout,  in  all  the  complexity  of  the 
meanings  and  final  causes  of  these  various  payments,  we 
find  the  machinery  for  effecting  them  to  be  the  same.  In 
the  last  analysis,  the  payments  may  be  regarded  as  in- 
terest, or  interest  plus  earnings  of  shrewdness,  or  rent,  or 
monopoly  extortion  ;  but  they  all  come  from  gross  receipts 
flowing  first  into  the  hands  of  the  active  capitalists,  who 
may  then  be  under  bonds  to  make  the  payments  to  other 
persons. 

So  much  as  to  the  mode  in  which  the  simple  conditions 
assumed  at  the  beginning  of  this  inquiry  are  affected  by 
the  varied  and  scattered  ownership  of  capital  and  other 
instruments  of  production.  A  different  modification,  and 
a  more  important  and  instructive  one,  comes  in  another 
direction.  At  the  outset,  as  all  capital  was  supposed  to 


70  WAGES   AND   CAPITAL. 

be  in  the  hands  of  active  business  men,  so  all  laborers 
were  supposed  to  be  hired  by  them.  It  is  time  now  to 
consider  how  far  laborers  in  fact  are  in  this  condition, 
and  how  far  the  conclusions  derived  from  the  analysis  of 
the  simple  case  need  to  be  modified  in  regard  to  the  la- 
boring classes. 

Clearly,  in  almost  every  country  great  numbers  of 
persons  who  are  usually  spoken  of  as  laborers  are  not 
hired  by  capitalists.  It  happened  that  in  England,  at  the 
time  when  the  classic  economists  were  developing  their 
system,  a  larger  proportion  of  manual  workers  were  in  this 
situation  than  has  been  the  case  in  any  other  time  or 
place;  hence,  the  easy  assumption  of  such  conditions  by 
these  writers,  and  hence  (in  good  part)  their  easy  accept- 
ance of  the  wages-fund  doctrine.  But  even  in  England 
there  were  and  are  unmistakable  exceptions.  Cobblers, 
carpenters,  cabmen  ply  their  trades  independently,  either 
owning  or  hiring  their  tools.  In  other  countries  the  excep- 
tions are  more  important  and  numerous.  The  tillers  of  the 
soil,  who  in  England  are  employed  by  capitalist  farmers, 
elsewhere  are  very  commonly  owners  or  tenants.  In  coun- 
tries like  France  or  the  United  States,  millions  of  men 
whose  work  is  mainly  hard,  monotonous  manual  labor,  are 
owners  of  plots  of  land,  and  as  independent  of  hire  and  of 
stipulated  wages  as  any  great  employer.  On  the  continent 
of  Europe  generally,  production  on  a  large  scale  has  not 
permeated  manufacturing  industry  as  much  as  in  English- 
speaking  communities,  and  the  independent  artisan  holds 
his  own  in  larger  degree  against  the  capitalist  producer. 
The  blacksmith,  the  carpenter,  the  shoemaker,  the  weaver, 
have  nowhere  been  entirely  crowded  out  by  the  factory, 
with  its  regime  of  hired  workmen.  In  many  countries  such 
laborers  still  form  a  large  part  of  the  body  of  persons 
whose  income  is  essentially  reward  for  physical  exertion. 

The  question  may  be  raised  whether  such  independent 


THE    MACHINERY   OF    DISTRIBUTION.  ji 

workers  can  be  said  to  get  simply  wages.  They  usually 
have  some  capital ;  indeed,  they  must  have  some  small 
possessions  of  their  own  in  order  to  maintain  their  posi- 
tion of  independence.  They  may  perhaps  be  described 
as  capitalists,  and  as  receiving  something  different  from 
wages ;  this  term  being  confined  to  the  hired  workmen 
who  get  stipulated  sums  from  employers.  Any  one  who 
is  familiar  with  the  traditional  plan  of  economic  text- 
books, inherited  as  it  is  from  the  classic  days,  will  see  with 
how  uncertain  a  voice  most  writers  have  spoken  on  this 
topic.  Distribution  is  usually  set  off  under  the  rubrics  of 
wages,  interest,  rent ;  profits  being  sometimes  added  of 
late  years  as  a  fourth  independent  constituent.  Wages 
are  described  to  mean  any  reward  for  immediate  exertion, 
regardless  of  the  mode  in  which  the  reward  comes.  In 
the  detailed  discussions  of  wages,  however,  the  case  of 
the  hired  laborer  and  of  what  the  employer  will  pay  him 
occupies  the  chief  place.  In  everyday  speech,  too,  this  is 
the  person  whom  we  think  of  as  receiving  wages;  and  the 
large  array  of  persons  who  get  a  return  for  labor  in  a 
different  way  are  left  without  any  distinctive  designa- 
tion. 

The  same  question  of  classification  and  nomenclature 
appears  in  the  suggestion  that  the  independent  workman 
is  not  a  laborer  but  a  business  man, — -an  entrepreneur.  So 
considered,  he  would  be  said  to  receive,  not  wages,  but 
that  mixed  and  vexed  income  which  Mill  called  wages 
of  superintendence,  and  which  in  our  own  day  is  entitled 
sometimes  business  profits,  sometimes  profits  simply,  some- 
times managers'  earnings.  And  certainly  a  good  degree 
of  justification  for  this  course  is  to  be  found.  The  gap 
between  the  poorest  independent  craftsman,  and  the  great 
employer  whom  we  think  of  as  primarily  a  capitalist  and 
as  earning  something  different  from  wages,  is  filled  by  a 
series  of  different  workers,  among  whom  it  is  hard  to  find 


j2  WAGES   AND   CAPITAL. 

any  sharp  line  of  division.  Where  do  business  profits 
cease  and  mere  wages  begin  ? 

We  need  not  stop  for  any  prolonged  consideration  of 
this  question,  which  involves  not  only  matters  of  termi- 
nology, but  very  substantial  problems.  Probably  the  best 
plan  for  the  exposition  of  distribution  at  large  is  to  de- 
scribe all  reward  for  exertion  as  wages  ;  thereafter  point- 
ing out,  however,  how  various  are  the  forms  of  exertion, 
and  how  different  the  causes  which  affect  the  reward  of 
different  forms;  and  in  the  end  going  so  far  as  to  give  a 
special  name,  such  as  business  profits  or  managers'  earn- 
ings, to  the  wages  for  some  peculiar  kinds  of  work.  Cer- 
tainly for  most  purposes  of  classification  we  should  not 
be  consistent  if  we  drew  the  line  between  wages  and  not 
wages  according  to  the  bare  independence  of  the  work- 
man. The  cobbler  who  works  alone  in  his  petty  shop 
gets,  in  the  main,  a  return  for  labor  as  much  as  the  work- 
man in  the  shoe  factory  ;  the  peddler  and  the  shopkeeper's 
assistant,  the  small  farmer  and  his  hired  workman,  all 
earn  an  income  by  labor.  No  doubt  the  shrewdness  and 
judgment  of  the  farmer  or  peddler  affect  his  income,  as  the 
skill  and  capacity  of  the  hired  workman  affect  his.  No 
doubt,  too,  the  class  of  which  the  farmer  and  peddler  are 
types  own  some  of  the  instruments  of  production,  capital  or 
land,  and  get  their  earnings  in  the  course  of  using  such  in- 
struments. But  the  earnings  come,  in  a  multitude  of  cases, 
without  that  conscious  consideration  of  the  income-yielding 
possibilities  of  capital  and  land  which  accompanies  the  work 
of  the  large  capitalist  and  large  landowner.  Theoretically 
the  earnings  may  be  parcelled  off  as  partly  interest,  partly 
rent,  partly  wages.  Practically  they  come  in  as  the  re- 
turn for  so  much  work,  shrinking  or  swelling  with  the 
fortunate  or  unfortunate  use  of  such  labor  and  capital 
as  the  individual  may  have  at  his  disposal. 

But  in  one  important   respect   the  receipts  of  the  indc- 


THE    MACHINERY   OF    DISTRIBUTION. 


73 


pendent  laborer,  even  though  they  be  regarded  for  most 
purposes  as  wages,  are  to  be  put  in  the  same  class  as 
those  of  the  well-to-do  capitalists  who  were  supposed  at  the 
outset  of  the  present  inquiry  to  be  the  only  owners  of  cap- 
ital and  the  employers  of  all  laborers.  The  independent 
workman  gets  a  primary  and  not  a  derivative  share  of 
the  total  income  of  society.  With  regard  to  the  ma- 
chinery by  which  distribution  is  accomplished,  he  belongs 
in  a  different  class  from  the  hired  laborer,  and  belongs 
in  the  same  class  as  the  active  capitalist.  He  becomes 
legal  and  absolute  owner  of  a_  part  of  the  output  of 
society,  and  so  comes  into  direct  control  of  part  of  the 
gross  money  income.  He  may  be  fettered  by  debt,  as 
his  fellow  on  a  large  scale  may  be  ;  but  he  is  dependent 
on  no  fixed  bargain  for  the  money  income  which  will 
serve  him  to  procure  a  share  in  society's  real  income 
of  consumable  goods.  Herein  his  situation  differs  es- 
sentially from  that  of  the  hired  laborer,  and  herein  the 
phenomena  of  real  life  differ  essentially  from  those  as- 
sumed at  the  beginning  of  this  inquiry.  The  hired  la- 
borer gets  his  money  income  as  the  result  of  a  bargain 
by  which  he  sells  his  working  power  for  a  space.  The 
independent  workman  gets  his  money  income  directly  from 
the  sale  of  what  he  makes.  The  situation  is  not  always 
advantageous  to  the  latter.  The  peasant  proprietor  and 
the  petty  craftsman  do  not  necessarily  prosper  more  than 
the  hired  mechanic.  But  the  hired  workman  is  directly 
dependent  for  his  money  income  on  an  employing  capi- 
talist; the  independent  workman  is  not. 

For  an  understanding  of  the  machinery  by  which  dis- 
tribution is  accomplished  in  modern  times,  the  classifica- 
tion of  sources  of  income  should  thus  be  different  from 
that  to  be  adopted  for  an  explanation  of  the  fundamental 
causes.  For  the  latter  purpose  the  different  sources  of 
income  may  still  be  appropriately  divided  into  wages, 


74 


WAGES   AND   CAPITAL. 


interest,  rent,  with  possibly  business  profits  as  a  fourth 
term.  But  so  far  as  the  concrete  mode  in  which  money 
income  (and  this  is  the  first  step  to  real  income)  reaches 
different  hands,  we  must  put  on  one  side  all  the  inde- 
pendent producers,  whether  they  conduct  operations  on  a 
large  scale  or  on  a  small ;  on  the  other  side,  all  receivers 
of  stipulated  interest  or  stipulated  rent,  and  all  hired 
laborers.  The  former  get  a  primary,  the  latter  a  de- 
rivative share  of  the  total  income  of  society. 

Both  the  primary  and  the  derivative  shares,  as  they 
appear  in  fact,  may  or  may  not  be  what  the  economist 
would  analyze  as  simple  incomes.  The  independent  pro- 
ducers may  be  great  capitalists,  and  their  net  receipts, 
separated  into  the  constituent  parts  which  are  important 
for  the  permanent  explanation  of  things,  may  be  made  up 
of  interest,  and  rent,  and  wages  ordinary  and  extraordi- 
nary ;  or  they  may  be  small  fry,  in  whose  earnings  wages 
for  very  common  sorts  of  labor  play  so  large  a  part  that 
the  other  constituents  may  be  dropped  from  consideration. 
The  other  dependent  persons  may  similarly  get  mixed  or 
simple  incomes.  The  interest  paid  by  a  corporation  may 
stand  in  part  for  natural  advantages  which  have  been 
capitalized  and  converted  into  a  bonded  debt ;  that  which 
is  interest  in  form  being  thus  rent  in  substance.  On  the 
other  hand,  the  payment  which,  in  ordinary  parlance,  is 
rent  for  building  or  for  a  plot  of  land,  is  usually  a  mixture 
of  the  rent  and  interest  of  the  economist.  Concrete  wages, 
too,  may  be  a  complex  return,  including  in  the  case  of  a 
highly  trained  workman  not  only  wages  for  labor  but 
interest  for  the  capital  sunk  in  his  education.  Thus  dis- 
tribution, as  analyzed  in  its  last  elements,  is  an  abstrac- 
tion :  its  demarcations  rarely  correspond  to  the  actual  re- 
ceipts which  are  seen  in  the  industrial  world.  It  may 
explain  the  situation,  and  in  that  larger  sense  describe  it; 
but  it  does  not  describe  with  accuracy  the  direct  phenom- 


THE    MACHINERY   OF   DISTRIBUTION. 


75 


ena.  On  the  other  hand,  the  analysis  of  distribution 
which  has  formed  the  subject  of  this  chapter  presents  the 
literal  facts  of  the  case.  The  incomes  of  independent 
producers,  large  and  small,  are  the  primary  sources  of 
distribution  ;  interest  payments,  rent  payments,  wages  of 
hired  laborers,  are  derivative,  and  their  recipients  may  be 
described  as  dependent. 

The  point  has  now  been  reached  where  we  can  observe 
the  differences,  in  their  relation  to  capital,  between  the 
wages  of  the  hired  laborer  and  those  of  the  independent 
workman.  The  hired  laborer  is  undoubtedly  dependent 
on  capital,  and  gets  his  wages  from  capital,  in  a  sense  in 
which  the  independent  workman  does  not.  His  money  in- 
come, the  first  and  the  essential  means  toward  getting  a 
real  income,  is  turned  over  to  him  by  capitalists.  It 
comes  from  funds  in  the  possession  of  a  body  of  which 
his  immediate  employer  is  a  member,  and  which  includes 
all  the  active  co-operators  in  the  management  and  control 
of  industry.  Except  in  so  far  as  he  has  made  a  contract 
covering  some  length  of  time,  his  wages  depend  recur- 
rently on  their  disposition  to  use  for  productive  opera- 
tions their  inflowing  money  receipts.  In  this  sense  his 
earnings  depend  on  a  wages  fund — on  the  sums  which 
the  employers  judge  it  expedient  to  turn  to  the  hire  of 
labor  ;  and  in  this  sense  the  independent  workmen  evi- 
dently do  not  depend  on  capitalists  or  on  a  wages  fund. 

In  another  sense,  all  workmen,  whether  hired  or  inde- 
pendent, get  their  wages  from  capital  and  are  dependent 
on  a  wages  fund.  This  is  in  the  sense  that  all  real  income 
is  derived  from  consumable  commodities;  that  these  are 
the  product  of  past  labor;  that  the  supply  of  them  avail- 
able for  fresh  use  at  any  time  is  small ;  and  that  the  supply 
for  any  considerable  stretch  of  time  exists  mainly  in  the 
form  of  inchoate  wealth.  The  real  income  of  all  classes 
in  the  community  comes  from  past  product,  and  in  the 


76 


WAGES   AND   CAPITAL. 


main  from  real  capital.  This  is  a  very  different  wages- 
fund  doctrine  from  the  other.  It  will  hold  good  under 
any  conditions  of  society,  so  long  as  the  arts  are  carried 
on  in  such  manner  that  a  long  stretch  of  time  elapses  be- 
tween the  beginning  and  the  end  of  the  successive  steps 
in  production. 

These  two  things  have  been  curiously  interwoven  and 
confounded  in  the  long  controversy  over  the  source  and 
measure  of  wages.  The  wages-fund  doctrine,  in  the  form 
in  which  it  so  long  held  sway,  was  supposed  to  apply  pri- 
marily to  laborers  hired  by  capitalist  employers.  It  was 
supposed,  rather  than  explicitly  stated,  so  to  apply,  for 
the  limitation  was  more  often  tacitly  assumed  than  pointed 
out  in  terms.  Adam  Smith's  brief  but  pregnant  para- 
graphs had  directly  connected  the  payment  of  wages  from 
capital  with  their  payment  from  the  funds  of  employers. 
Scarce  one  workman  out  of  ten  in  Europe,  says  he,  is  an 
independent  artisan ;  hence  the  wages  of  the  great  mass 
depend  on  what  the  masters  can  and  will  pay  them.  Later 
English  writers  had  the  same  organization  of  industry  in 
mind,  though  they  did  not  often  say  so.  While  their  the- 
ories were  stated  in  general  terms,  they  were  framed  with 
an  eye  to  the  conditions  and  the  needs  of  the  England  of 
that  day,  where,  as  it  happened,  the  great  mass  of  labor- 
ers were  of  the  hired  and  dependent  class.  At  a  later 
stage  in  the  discussion  it  was  more  often  pointed  out  in 
express  terms  that  hired  labor  alone  was  meant  to  be 
within  the  scope  of  the  wages-fund  doctrine.  When  the 
whole  subject  then  came  to  be  overhauled,  it  was  seen  that 
this  assumption  had  been  more  or  less  overtly  made,  and 
the  avowed  scope  of  the  doctrine  was  accordingly  limited. 
Its  advocates  set  forth  that  it  pretended  to  do  no  more 
than  explain  how  the  wages  of  hired  laborers  were  de- 
termined. Its  opponents  accepted  the  limitation,  and  re- 
torted either  by  pointing  out  how  large  was  the  number 


THE    MACHINERY   OF    DISTRIBUTION. 


77 


of  cases  so  left  unconsidered  and  unexplained,  or  by  ques- 
tioning whether  it  could  be  maintained  even  within  the 
chosen  limits.* 

Yet,  in  fact,  for  the  solid  truth  which  underlay  the  doc- 
trine as  to  real  capital  and  real  wages  it  was  not  necessary 
to  exclude  from  its  pale  all  other  than  hired  laborers; 
while,  on  the  other  hand,  so  far  as  these  hired  laborers 
were  concerned,  the  support  which  it  got  from  their  rela- 
tions with  their  immediate  employers  was  a  treacherous  one. 
None  other  than  these  direct  employers  were  usually  re- 
ferred to  as  the  holders  of  the  funds  on  which  laborers 
were  dependent.  When  it  began  to  be  asked  whether  the 
money  funds  which  they  could  pay  laborers  were  rigid  or 
elastic,  the  only  possible  answer  was  that  nothing  in  the 
nature  of  a  predetermined  fund  existed,,  and  that  the  sums 


*  In  his  direct  discussion  of  wages,  the  younger  Mill  said  that  "wages 
depend  on  the  demand  and  supply  of  labour,  or,  as  it  is  often  expressed,  on 
the  proportion  between  population  and  capital.  By  population  is  here 
meant  the  number  only  of  the  labouring  class,  or  rather  of  those  •who  work 
for  'lire''  (The  italics  are  mine.)  Political  Economy,  Book  II,  ch.  xi, 
§i.  Much  the  same  sort  of  expression  appears  in  the  chapter  on  Profits, 
Book  II,  ch.  xv,  §  6.  Yet,  in  his  first  consideration  of  capital,  Mill  had 
pointed  out  that  "  when  the  labourer  maintains  himself  by  funds  of  his 
own,  as  when  a  peasant  farmer  or  proprietor  lives  on  the  produce  of  his 
land  or  an  artisan  works  on  his  own  account,  they  are  still  supported  by 
capital — that  is,  by  funds  provided  in  advance."  Book  I,  ch.  iv,  §  2. 
Compare  what  is  said  of  Mill  below,  in  Part  II,  chapter  xi.  Cairnes,  in  com- 
menting on  Mill's  statement  of  the  wages-fund  doctrine,  remarks  paren- 
thetically that  "  the  question  at  present  is  exclusively  of  hired  labor." 
(Cairnes  himself  puts  the  word  "hired"  in  italics).  Leading  Principles, 
Book  II,  ch.  i,  §  5.  Hence  Sidgwick  remarks,  at  the  beginning  of  a  chap- 
ter on  general  wages,  that  "  since  other  economists  generally  denote  by 
'wages'  (when  used  without  qualification)  the  remuneration  of  labour 
hired  by  employers,  it  seems  convenient  to  adopt  this  meaning  in  the 
critical  discussion  [of  the  wages-fund  doctrine  chiefly]  which  will  occupy 
the  first  part  of  this  chapter." — Principles  of  Political  Economy,  Book  II, 
ch.  viii,  j$  i. 


78  WAGES    AND   CAPITAL. 

which  they  had  at  command,  whatever  causes  might  affect 
them,  were  not  in  the  nature  of  an  accumulation  that  was 
fixed  once  for  all  when  the  bargain  between  them  and  their 
workmen  was  made.  With  this  negative  answer  the  whole 
traditional  mode  of  dealing  with  wages  and  capital  was 
given  up.  It  was  forgotten  that  in  an  important  sense  hired 
laborers  are  primarily  dependent  for  their  wages  on  the 
funds  which  the  whole  body  of  active  capitalists  can  and 
will  turn  over  to  them  ;  and  that  in  a  still  more  important 
sense  all  laborers,  hired  or  independent,  get  their  real 
remuneration  from  that  product  of  past  labor  to  which 
the  earlier  economists  had  given  the  name  of  capital. 

One  further  topic  may  be  touched  before  this  length- 
ened inquiry  is  brought  to  a  close.  So  far  as  the  ma- 
chinery of  distribution  is  concerned,  the  receivers  of  rent 
and  interest  payments  and  the  hired  laborers  have  been 
described  as  alike  getting  derivative  incomes,  and  as  in 
that  sense  alike  dependent.  It  may  be  asked  whether 
there  is  any  greater  degree  of  dependence  for  the  labor- 
ers than  for  the  others. 

In  one  respect  the  laborers  are  certainly  more  de- 
pendent. The  engagements  with  them  are  usually  for  a 
shorter  period  of  time.  The  active  capitalist  often  binds 
himself  for  years  with  those  to  whom  he  pays  rent  or  in- 
terest ;  for  weeks  only,  as  a  rule,  with  those  to  whom  he 
pays  wages.  This  is  not  always  the  case.  The  growing 
strength  of  organization  among  hired  '  laborers  has  led 
in  modern  times  to  more  permanent  engagements,  in 
which  both  sides  bind  themselves  for  months  or  a  year. 
Usually,  however,  the  contract  with  the  hired  laborer 
covers  a  brief  period.  He  is  liable  to  be  called  on  at 
short  notice  to  show  his  strength  in  bargaining  with  the 
employer. 

The  longer  term  over  which  the  rentier  (to  use  that 
convenient  Continental  term)  makes  his  bargain  is  not  al- 


THE    MACHINERY   OF    DISTRIBUTION.  79 

ways  to  his  advantage.  He  commits  his  principal  irrev- 
ocably for  a  series  of  years,  and  takes  his  chances  that 
his  debtor,  the  active  capitalist,  will  repay  it  when  the 
loan  falls  due,  being  meanwhile  powerless  so  long  as  the 
interest  instalments  are  met.  That  investor  whose  stipu- 
lated income  would  be  called  by  the  economist  rent  is 
indeed  usually  in  a  more  assured  position.  The  natural 
site  or  resource  which  enables  him  to  get  the  business 
man's  promise  of  stated  payments  is  likely  to  endure  in 
another's  hands  as  well  as  it  would  in  his  own  ;  and  if  his 
rent  does  not  appear  punctually,  he  usually  finds  its  source 
unimpaired  when  he  retakes  possession.  But  so  far  as  the 
investor  of  capital  proper,  the  recipient  of  true  interest, 
is  concerned,  the  advantage  which  he  may  have  over  the 
laborer  from  the  more  permanent  nature  of  his  contract 
with  the  business  manager,  is  conditional  on  the  care  and 
judgment  with  which  he  selects  his  debtor.  Economic 
history,  ancient  and  modern,  presents  a  plenty  of  cases  in 
which  the  greater  security  of  the  investor's  position  over 
short  periods  has  proved  his  ruin  in  the  long  run. 

Much  has  been  said  of  late  years  in  regard  to  another 
phase  of  the  hired  laborer's  dependent  position  :  the  im- 
portance of  his  strength  in  bargaining.  Recurrently, — as  a 
rule  at  short  intervals, — the  contract  on  which  his  income 
depends  must  be  renewed.  If  he  stands  alone;  if  he  has 
no  savings  from  past  income  which  would  enable  him  to 
wait  and  see  what  the  market  offers  ;  if  he  is  ignorant  and 
generally  helpless, — he  bargains  at  great  disadvantage.  If 
he  is  banded  with  his  fellows,  if  he  possesses  the  where- 
withal to  make  a  trial  of  strength,  and  if  he  has  shrewd 
and  well-informed  leaders,  he  bargains  to  the  best  ad- 
vantage. The  strength  which  the  trades  union  gives 
the  hired  laborer  in  dealing  with  his  employers  was  not 
doubted  even  in  the  days  of  greatest  faith  in  the  natural 
laws  which  were  supposed  to  regulate  economic  phenom- 
7 


So  WAGES   AND    CAPITAL. 

ena  in  general,  and  wages  in  particular.  No  one  would 
question  it  in  these  less  conservative  times.  The  bargain- 
ing of  the  outside  investor  with  his  active  debtor  is  not 
affected  at  bottom  by  factors  so  very  different  from  those 
just  mentioned.  Usually  he  can  wait  a  bit  for  his  in- 
come: therein  his  ordinary  position  is  better  than  that  of 
the  hired  laborer.  He  is  often,  but  by  no  means  always, 
reasonably  shrewd  and  intelligent,  and  knows  what  the 
general  market  affords.  He  gets  advice,  which  may  or 
may  not  be  good,  from  the  large  class  of  bankers  and 
brokers  who  make  a  business  of  placing  investments  As 
to  his  legal  position  and  the  mode  in  which  the  machinery 
of  justice  enables  him  to  enforce  his  claims,  he  may  have 
been  in  former  days  better  cared  for  than  the  hired  la- 
borer who  is  also  a  creditor  of  the  active  capitalist  ;  but 
the  mechanics'  liens  of  modern  legislation  give  the  work- 
men much  the  best  of  it  here,  apart  from  the  fact  that  the 
more  rapid  recurrence  of  his  stipulated  payments  dimin- 
ishes the  sum  which  at  any  one  time  is  at  stake. 

This  brief  notice  of  some  aspects  and  effects  of  the 
hired  laborer's  dependent  position  will  serve  to  explain 
the  sense  in  which  the  term  dependence  is  to  be  under- 
stood. We  may  keep  far  from  that  pessimistic  view  which' 
finds  its  expression  in  the  turgid  description  of  the  la- 
borer as  the  slave  of  the  employer,  without  going  to  the 
opposite  extreme  of  concluding  that  the  laborer  is  no 
worse  off  than  the  investor,  because  both  alike  are  de- 
pendent for  income  on  what  the  active  business  manager 
has  promised  or  will  promise  to  pay  them.  Neither  the 
helpless  widow  and  orphan,  nor  the  down-trodden  la- 
borer,— two  familiar  figures  confronting  each  other  in  the 
literature  of  social  controversy, — are  really  typical  of  the 
practical  outcome  of  this  dependence.  As  to  the  hired 
laborer,  his  position  does  indeed  show  that  the  ownership 
of  wealth  in  modern  societies  is  very  unequally  divided, 


THE    MACHINERY   OF    DISTRIBUTION.  gl 

and  in  so  far  is  not  consistent  with  that  ideal  organization 
-which,  under  ideal  conditions,  would  doubtless  bring  the 
maximum  of  human  happiness.  But  it  is  consistent  with 
a  steady  improvement  in  his  condition,  in  his  place  and 
power  in  the  community,  and  in  his  sources  of  happiness; 
and  therefore  we  need  not  despair  if,  men,  manners,  and 
morals  being  what  they  now  are,  it  is  perhaps  the  only 
position  he  is  likely  to  have  for  a  long  time  in  the  future. 


CHAPTER   IV. 

THE    ELASTICITY    OF    THE    WAGES    FUND. 

THE  results  reached  in  the  preceding  chapters,  while 
different  in  important  respects  from  those  usually  asso- 
ciated with  the  wages  fund  doctrine,  have  yet  been  largely 
conservative.  It  has  appeared  that  all  wages  are  paid 
from  the  products  of  past  labor,  and  that  the  supply  of 
products  of  past  labor  exists  mainly  in  the  form  of  real 
capital.  It  has  appeared,  too,  that  the  class  of  hired 
laborers  not  only  derive  their  wages  from  capital  in  this 
sense,  but  that  they  are  dependent,  for  their  share  of  the 
real  income  into  which  capital  steadily  ripens,  on  the 
funds  which  the  employing  class  find  it  advantageous  to 
turn  over  to  them.  It  remains  now  to  consider  another 
aspect  of  the  old  doctrine, — whether  the  capital  from 
which  wages  come  is  rigid,  or  elastic;  predetermined,  or 
easily  adjusted  to  present  demands.  This  question  may 
be  considered  as  to  both  sides  of  the  doctrine  :  as  to  the 
sources  of  the  real  income  going  to  all  laborers,  and 
those  of  the  money  income  going  to  manual  laborers,  and 
more  especially  to  hired  manual  laborers. 

It  will  be  convenient  to  begin  by  inverting  the  former 
order,  and  to  consider  first  the  case  of  the  hired  laborers. 
Are  the  money  funds  which  employers  can  turn  over  to 
them  limited?  Are  they  so  determined  by  previous  hap- 
penings that  a  given  sum  must  go  to  laborers,  and  no 
more  can  go  ?  Or  are  they  elastic,  swelling  easily  when 

82 


THE    ELASTICITY   OF    THE    WAGES    FUND.  83 

employers  are  led  by  competition  among  themselves  or 
by  pressure  from  their  workmen  to  advance  wages,  and 
shrinking  promptly  when  their  niggardliness  or  ill  fortune 
leads  them  to  retrench  ? 

One  part  of  the  answer  has  already  been  given.*  As 
to  the  direct  employer,  considered  by  himself,  it  is  clear 
that  there  is  no  rigidity  or  predetermination.  He  sells 
and  borrows,  adjusts  his  payments  and  receipts,  and 
nurses  his  bank  account.  Within  limits  that  are  certainly 
not  narrow,  he  can  make  his  available  funds  fit  new  con- 
ditions and  new  demands.  In  the  language  of  Thornton, 
who  was  among  the  first  to  face  squarely  this  phase  of  the 
problem,  it  sounds  like  mockery  or  childishness  to  ask  if 
the  funds  which  he.  can  apply  to  wages  are  limited  or  pre- 
determined.! 

Consider,  however,  the  whole  employing  class,  as  it 
was  described  in  the  last  chapter.  For  the  hired  laborers 
as  a  whole,  the  money  wages  of  a  season  came  from  the 
large  body  of  active  capitalists  :  from  the  merchants  who 
buy  goods  or  make  advances  on  them,  from  the  bankers 
who  discount  and  lend,  as  well  as  from  the  immediate 
employers.  Is  the  total  of  funds  which  they  can  pay  in 
wages  limited  ? 

No  doubt  there  are  some  limitations  here.  There  is  a 
general  limit  of  some  sort,  in  the  total  of  money  means 
which  the  sale  of  output  or  product  brings  into  the  hands 
of  the  managing  class.  There  are  more  specific  limits 
within  this  general  one.  Contracts  of  long  standing  and 
duration  compel  the  payment  of  certain  sums  to  investors, 
in  the  way  of  interest  or  rent.  Further,  the  funds  directed 
to  production  must  be  apportioned  with  regard  to  exist- 
ing methods  and  existing  supplies.  That  workmen  may 

*  See  pages  62-64. 

f  Sec  what  i.s  said  of  Thornton  below,  at  pages  246-255. 


34  WAGES   AND   CAPITAL. 

be  employed,  machinery  and  buildings  must  be  on  hand, 
and  materials  must  be  provided.  In  other  words,  a  large 
part  of  the  gross  money  income  of  the  season  must  go  to 
purchases  which  may  indeed  in  the  last  analysis  be  re- 
solvable into  a  succession  of  advances  to  laborers,  but 
which  involve  no  present  payments  to  laborers.  This 
was  what  one  of  the  last  defenders  of  the  old  doctrine  had 
in  mind  when  he  divided  capital  into  the  three  constituent 
parts  of  plant,  materials,  and  wages  fund,  and  pointed  out 
that  only  the  wages-fund  part  was  available  for  paying 
laborers.*  While  the  individual  employer,  supported  as 
he  is  by  the  multiform  apparatus  of  credit  and  connection, 
is  not  compelled  to  make  any  hard-and-fast  apportion- 
ment of  his  directly  available  means  between  these  dif- 
ferent uses,  the  body  of  employers  must  divide  their  pur- 
chases and  advances  in  a  manner  which  is  determined  in 
its  main  lines  by  the  state  of  the  arts  and  the  succession 
of  the  productive  operations. 

But,  with  all  this  admitted,  it  still  remains  clear  that 
nothing  in  the  nature  of  a  predetermined  and  rigid  wages 
fund  can  be  found.  While  the  payments  due  to  outside 
investors  for  interest  and  rent  may  be  fixed  for  the  mo- 
ment, the  sums  which  the  active  capitalists  can  set  aside 
for  their  own  enjoyment  are  flexible.  The  apportionment 
of  those  sums,  again,  which  go  to  the  maintenance  of  the 
settled  course  of  production  can  not  be  said  to  be  rigor- 
ously predetermined  for  the  different  channels  of  advances 
to  labor  on  the  one  hand,  the  purchases  of  tools  and  ma- 
terials on  the  other.  The  limits  are  elastic.  Even  the 

*  Cairnes,  Leading  Principle;,  Book  II,  ch.  i.  Compare  what  is  said 
below  at  page  257.  Cairnes  apparently  had  in  mind,  when  making 
this  divi>ion,  the  money  funds  of  the  direct  employers,  which  go  to  the 
one  destination  or  the  other  ;  not  the  division  of  the  actual  possessions 
of  the  community  into  finished  and  enjoyable  good>  on  the  one  hand 
and  inchoate  wealth  on  the  other. 


THE    ELASTICITY   OF    THE   WAGES   FUND.  85 

total  money  income  at  the  disposal  of  the  capitalist  class 
can  not  be  described  as  a  fixed  thing.  It  has  been  spoken 
of  as  the  total  price  of  the  output;  and  such  it  is.  But 
that  total  price  depends  on  the  relation  of  the  circulating 
medium  to  the  whole  volume  of  things  sold.  The  mod- 
ern machinery  of  credit  as  a  substitute  for  money  makes 
prices  and  total  money  payments  for  commodities  vary 
under  very  short-lived  influences.  Banks  of  deposit  and 
issue,  which  form  so  important  an  element  in  the  whole 
body  of  the  active  managers  of  industry,  can  swell  their 
loans,  and  so  can  add  effectively  to  the  total  of  money 
funds  received  in  exchange  for  the  industrial  output  and 
available  for  fresh  operations.  In  almost  every  direction 
the  causes  which  determine  the  advance  by  the  active 
capitalists  of  a  part  of  their  funds  to  laborers,  operate  in 
the  rough,  and  with  no  machinelike  precision. 

If  therefore  we  put  the  case  of  a  general  trades  union 
embracing  all  the  hired  laborers,  and  a  general  strike  by 
them  for  higher  wages, — a  case  which,  improbable  and  un- 
real as  it  may  be,  has  rightly  been  made  to  play  a  promi- 
nent part  in  the  theoretic  controversy, — the  answer  must 
be  that  nothing  in  the  proximate  conditions  of  industry 
stands  in  the  way  of  their  success.  Success,  that  is,  in  the 
sense  which  alone  is  here  under  consideration:  an  advance 
in  money  wages.  •  A  larger  share  of  the  total  inflowing 
receipts  of  the  active  capitalists  might  be  diverted  into 
the  hands  of  the  hired  laborers.  Possibly  those  total 
receipts  would  be  simply  swelled  by  an  increase  of  the 
bank  credit  part  of  the  circulating  medium.  Possibly 
the  employers  might  be  compelled  to  submit  to  a  reduc- 
tion of  their  net  profits.  Possibly  a  diminution  of  the 
funds  applied  to  the  purchase  of  materials  and  plant 
might  shift  the  shrinkage  of  profits  more  particularly  to 
those  who  happened  at  the  time  to  be  in  largest  part  the 
holders  of  these  forms  of  inchoate  wealth.  The  outside 


86  WAGES   AND   CAPITAL. 

investor,  though  usually  shielded  by  the  length  of  his 
contract  from  the  contingencies  of  the  season,  might  yet 
feel  in  some  degree  the  effects  of  the  general  pressure  ; 
here  and  there  he  would  encounter  defaults,  reorganiza- 
tions, new  and  harder  terms  on  old  loans  falling  due  and 
on  fresh  funds  seeking  investment.  At  all  events,  there 
are  no  cast-iron  obstacles  to  the  attainment  of  the  im- 
mediate end  of  the  universal  strike :  higher  money  wages. 
As  to  the  eventual  outcome,  the  situation  doubtless 
might  be  different.  The  forces  which  permanently  deter- 
mine distribution  would  come  into  play.  To  follow  their 
working  is  not  within  the  scope  of  the  present  inquiry, 
and  is  called  for  the  less  because  economists  are  here 
much  more  nearly  in  agreement  than  they  are  on  the 
machinery  by  which  the  result  is  brought  about.  The 
general  rise  in  money  wages  (which  may  be  assumed  not 
to  be  offset  by  any  corresponding  change  in  general 
prices)  would  bring  down  the  returns  of  the  capitalist 
class.  How  the  loss  would  be  divided  among  the  different 
members  of  this  class,  temporarily  and  even  permanently, 
would  be  hard  to  foresee.  Among  the  active  capitalists, 
some  would  be  at  first  hit  harder  than  others;  and  the 
distribution  of  the  loss  among  them,  through  the  transfer 
of  capital  and  the  working  of  competition,  would  be  no 
simple  or  certain  matter.  As  between  active  capitalists 
and  lending  investors,  in  the  course  of  the  recurrent  re- 
newal of  their  loans  and  contracts,  there  would  again  be 
a  tendency  to  distribution  of  the  loss,  whose  outcome 
could  not  be  clearly  foreseen.  At  bottom,  the  mode  in 
which  these  two  classes  would  act  in  face  of  the  loss  would 
depend  on  whether  the  business  men  had  been  getting,  be- 
fore it  set  in,  just  enough  to  induce  them  to  undergo  the 
labor  and  risk  of  production  ;  and  whether  the  investors, 
in  their  turn  had  been  receiving  just  enough  to  induce 
them  to  forego  immediate  expenditure  and  enjoyment. 


THE    ELASTICITY   OF    THE   WAGES    FUND.  g/ 

On  these  limits  the  last  word  has  perhaps  not  been  said. 
The  minimum  which  the  two  classes  of  capitalists,  under 
a  real  dilemma  between  cessation  of  operations  and  sub- 
mission to  a  smaller  income,  would  accept,  probably  goes 
lower  than  is  suggested  in  the  usual  expositions  of  this 
part  of  economic  theory.  But  wider  questions  are  here 
touched  than  those  connected  directly  with  the  proximate 
sources  of  money  wages,  and  it  is  not  necessary  to  attempt 
to  go  further  in  their  consideration.  Some  aspects  of 
them  will  be  touched  again  in  the  next  chapter;  and,  at 
all  events,  enough  has  been  said  to  indicate  that  they 
carry  us  far  from  the  wages  fund  controversy  proper. 

From  this  digression  we  may  return  to  the  main  sub- 
ject, and  summarize  the  results  of  the  investigation  up  to 
this  point.  Briefly  stated,  the  main  conclusion  so  far  has 
been,  that  for  a  season  the  resources  immediately  available 
for  capitalists  in  their  employment  of  laborers,  while  ob- 
viously not  indefinitely  extensible,  are  not  limited  or  pre- 
determined, and  that  the  money-wages  fund  which  goes  to 
hired  laborers  is  not  a  rigid  one. 

Next  comes  the  question  as  to  the  source  of  real  wages 
• — the  important  and  essential  question  as  to  the  welfare 
of  laborers.  An  increase  of  money  wages  is  of  no  ad- 
vantage unless  there  are  more  commodities  to  be  bought. 
Are  the  commodities  available  at  any  given  time  prede- 
termined in  amount  ? 

As  to  the  source  of  real  wages,  it  will  be  recalled,  no 
distinction  can  be  made  between  different  classes  of  la- 
borers or  between  different  classes  of  the  community. 
All  alike,  whatever  the  channel  through  which  their  money 
incomes  are  derived,  get  their  real  reward  from  the  finished 
and  enjoyable  commodities  which  appear  at  the  end  of 
the  lengthened  processes  of  production.  To  this  general 
proposition  there  is,  indeed,  an  exception  of  some  interest 
and  importance.  When  savings  are  made,  purchases  for 


88  WAGES   AND   CAPITAL. 

immediate  enjoyment  do  not  take  place.  The  proximate 
source  of  real  income  is  then  not  found  in  the  flow  of  con- 
sumable commodities.  The  consideration  of  this  case, 
however,  may  be  postponed.  Let  it  be  assumed  that  the 
whole  of  money  income  is  devoted  to  the  purchase  of 
presently  enjoyable  things.  On  the  elasticity  or  prede- 
termination of  the  real  income  thus  available  for  the  com- 
munity at  large  two  sets  of  questions  may  be  raised  :  one, 
as  to  the  limits  of  the  total  available  for  all ;  the  other, 
as  to  the  limits  of  the  share  which  can  go  to  wages. 

First,  as  to  the  total  real  income  of  the  community. 
That  this  is  at  least  in  large  degree  predetermined,  is  ob- 
vious from  a  consideration  of  the  form  in  which  at  any 
moment  it  exists  and  the  mode  in  which  it  recurrently  ap- 
pears. The  form  in  which  that  part  exists  which  is  most 
immediately  available,  is  in  the  stocks  of  the  retail  deal- 
ers. It  is  here,  in  the  great  mass  of  cases,  that  money 
income  is  converted  into  real  income.  The  stocks  which 
the  dealers  possess  are  a  given  quantity.  The  reserves 
of  things  ready  for  sale  which  are  held  by  the  wholesale 
dealers  and  the  manufacturers  are  again  so  much,  and  no 
more.  New  supplies  can  be  got  only  by  working  up  more 
materials;  and  the  materials  on  hand,  as  well  as  the  tools 
and  machinery  for  working  them  up,  are  for  the  time 
being  unchangeable.  Machinery  can  indeed  be  made  to 
work  more  or  less  quickly,  and  this  suggests  at  once  an 
elastic  rather  than  a  rigid  limit.  But  materials,  such  as 
wool,  cotton,  hides,  grain,  timber,  are  usually  dependent 
for  the  variation  of  production  on  the  return  of  the  sea- 
sons; and  some  considerable  time  must  elapse  before  the 
existing  supplies  can  be  substantially  changed.  What  is 
now  available,  and  what  will  be  available  for  a  year  or  two 
to  come,  has  been  determined  once  for  all.  If  all  the  active 
members  of  the  community  work  harder  or  more  effect- 
ively, they  may  secure  more  enjoyable  things  after  a 


THE    ELASTICITY   OF    THE    WAGES    FUND. 


89 


space;  but  present  income  depends  on  the  manner  and 
the  extent  to  which  the  earlier  preparatory  stages  of  pro- 
duction have  been  carried  on. 

Not  only  are  the  present  available  supplies  so  prede- 
termined, but  the  tendency  must  be  to  arrange  them  in 
such  manner  as  simply  to  meet  the  habitual  rate  of  con- 
sumption, and  leave  no  great  margin  or  reserve.  It  may 
be  suggested  that  in  the  stocks  of  merchants  and  producers 
there  is  a  reserve  fund  which  can  be  drawn  on  more  or 
less  rapidly,  and  which  can  be  replenished  from  further  re- 
serves of  half-finished  goods  and  materials.  Unquestion- 
ably such  a  reserve  exists.  The  whole  series  of  goods, 
from  those  barely  begun  to  those  almost  finished,  consti- 
tutes the  stock  from  which  the  necessaries  and  comforts 
of  the  period  must  come  ;  but  the  tendency  of  every  indi- 
vidual holder  of  the  stock  is  to  have  no  more  than  is 
needed  to  meet  the  usual  demands  from  consumers,  or 
from  the  producers  who  stand  next  in  the  order  of  trans- 
mission to  consumers.  Every  dealer  keeps  enough  in 
stock  to  meet  current  demands,  and  tries  to  keep  no  more. 
It  is  to  his  advantage  to  diminish  his  holdings  to  the  mini- 
mum consistent  with  satisfying  his  customers.  For  every 
business  manager,  whether  merchant  or  manufacturer,  a 
needlessly  large  stock  similarly  means  a  needlessly  large 
committal  of  his  funds.  The  nature  of  the  trade  and  the 
accident  of  individual  choice  and  judgment  must  -affect 
the  extent  of  the  holdings  in  the  different  storehouses 
which  contain  the  community's  varied  fund  for  more  or  less 
immediate  enjoyment  and  subsistence;  but  the  drift  in  all 
must  be  to  accommodate  the  supplies  to  habitual  and  ex- 
pected demands,  and  to  keep  no  excess.  If,  therefore,  a 
very  rapid  increase  of  consumption  were  suddenly  to  take 
place,  a  corresponding  deficit  would  ere  long  appear.  An 
increase  in  the  productive  power  of  the  community  can 
issue  in  a  real  increase  of  the  sources  of  satisfaction  onlv 


9o 


WAGES   AND   CAPITAL. 


by  giving  the  lengthened  methods  of  production  time  to 
work  out  the  result.  It  can  not  be  anticipated  by  making 
immediate  larger  drafts  on  the  existing  supplies,  for  these 
are  adapted  only  to  meet  the  usual  rate  of  consumption. 

So  much  is  in  general  true;  but  it  is  equally  true  that 
we  can  speak  here  only  of  tendencies  and  drifts,  of  limi- 
tations that  hold  good  against  great  and  rapid  changes, 
but  are  not  of  a  rigid  and  unalterable  sort.  The  habitual 
stocks  of  dealers  may  be  purchased  by  consumers  a  bit 
faster  or  a  bit  slower.  Commodities  on  the  way  to  com- 
pletion may  be  hurried  forward  somewhat.  Materials  on 
hand  may  be  drawn  on  more  rapidly,  and  a  period  of 
scanty  holdings  may  be  tided  over  by  some  straining  and 
ingenuity  until  fresh  supplies  can  be  made  to  appear.  An 
increased  satisfaction  to  consumers  may  be  yielded  by 
more  elaborate  manipulation  of  the  materials  already  on 
hand.  In  various  ways  of  this  sort  some  stretching  of  the 
existing  store  of  available  goods  is  possible.  That  it  has 
unmistakable  limits,  and  not  very  distant  limits,  is  not  in- 
consistent with  its  being  elastic  within  those  limits.  How 
great  the  degree  of  elasticity  is,  can  not  be  stated  in  exact 
terms  or  measured  by  any  conceivably  practicable  mode 
of  statistical  investigation. 

On  this  topic,  then,  as  on  so  many  others  in  economics, 
we  must  be  content  with  conclusions  stated  in  general 
terms.  The  real  income  of  the  community  for  any  season 
depends  mainly  on  forces  which  have  operated  in  the  past. 
It  is  settled  and  predetermined,  in  the  sense  that  it  can  be 
no  greater  than  is  made  possible  by  the  past  labor  given 
to  machinery,  to  materials,  to  all  the  earlier  stages  of  pro- 
duction. It  is  not  made  elastic  by  any  great  stocks  kept 
in  reserve  beyond  what  the  usual  rate  of  consumption 
makes  necessary.  Yet  it  is  not  rigidly  predetermined.  It 
may  become  in  some  degree  larger  or  smaller  under  the 
influence  of  forces  coming  into  operation  to-day  ;  it  is 


THE    ELASTICITY   OF    THE   WAGES   FUND.          gjy 

elastic  within  limits  which,  if  not  great,  are  not  so  small 
as  to  be  safely  set  aside  as  of  no  practical  import. 

The  second  and  narrower  part  of  this  question,  as  to 
the  elasticity  of  that  portion  of  the  real  income  of  the  com- 
munity which  goes  to  wages,  has  been  largely  answered  in 
what  has  been  said  on  the  broader  topic.  Real  wages  are 
limited  and  predetermined  in  general  as  much  as  other 
sources  of  income,  and  no  more.  Any  force  which  is  to 
bring  about  a  substantial  advance  in  the  real  remunera- 
tion which  laborers  shall  get  must  bring  about  its  effects 
through  the  slow-working  machinery  of  production.  Like 
other  classes,  they  may  get  some  immediate  increase  of 
real  enjoyment  by  a  defter  use,  a  better  combination,  the 
temporary  bridging  over  of  gaps,  in  the  existing  re- 
sources ;  but  a  considerable  advance  must  begin  at  the 
beginning,  and  go  through  the  orderly  stages  of  the  suc- 
cessive steps  which  lead  to  the  final  attainment  of  a  con- 
sumable commodicy. 

In  this  regard  it  is  immaterial  what  is  the  form  of  the 
remuneration  of  the  laborer  :  whether  he  gets  his  wages 
from  an  employer  once  for  all,  or  earns  an  independent  in- 
come which  is  substantially  all  of  it  return  for  present 
exertion,  or  gets  a  mixed  income  which  is  in  good  part 
resolvable  into  interest  or  rent.  Whatever  the  channel 
through  which  his  income  in  money  first  comes,  it  is  spent 
on  an  elastic  but  by  no  means  indeterminate  mass  of  fin- 
ished commodities. 

Still  a  further  question  presents  itself:  Is  the  share  of 
real  income  which  the  laborers  can  get,  as  compared  with 
the  total  available  for  all  classes,  more  flexible  than  this 
total  itself?  It  is  conceivable  that  though  the  whole  in- 
come of  the  community  were  predetermined  within  nar- 
row limits,  the  part  of  it  which  some  members  got  might 
be  very  flexible,  swelling  or  diminishing  according  to 
forces  of  immediate  operation.  Something  may  be  said 


92 


WAGES     AND   CAPITAL. 


as  to  the  situation  of  the  laborers  in  this  aspect  of  the 
case. 

The  first  step  in  such  a  changed  division  of  the  total 
income  must  be  an  advance  in  money  wages.  This  we 
may  suppose  to  have  been  effected,  as  to  hired  laborers, 
within  the  limits  already  set  forth  as  to  the  possible  money 
advances  which  they  can  secure  from  their  immediate  em- 
ployers;  as  to  others,  within  the  limits  made  possible  by 
the  conditions  of  demand  for  the  things  they  have  to  dis- 
pose of.  The  money  wages,  in  whatever  manner  obtained, 
go  to  the  purchase  of  commodities  the  whole  mass  of  which 
is  not  susceptible  of  rapid  enlargement.  If,  now,  among 
the  mass,  the  commodities  which  they  can  buy  and  will 
buy  are  of  a  particular  kind,  of  different  materials,  and  of 
different  fashioning  from  those  sought  by  other  classes, 
their  share  is  as  much  predetermined  as  the  whole  supply. 
If,  on  the  other  hand,  they  buy  very  much  the  same  sorts 
of  things  that  their  employers  and  other  supposed  betters 
buy,  they  can  get  a  larger  slice  of  real  income  at  once. 

Evidently  a  great  existing  inequality  of  wealth,  and  a 
great  disparity  of  tastes  and  habits,  would  make  the  sub- 
stantial change  more  slow  and  difficult  of  accomplishment. 
More  democratic  conditions  would  make  it  more  rapid 
and  easy.  As  between  the  great  mass  of  manual  labor- 
ers and  the  well-to-do,  the  disparity  of  tastes  and  habits  is 
in  most  communities  considerable,  and  a  great  shift  of  the 
real  sources  of  satisfaction  from  the  one  to  the  other 
could  not  easily  take  place.  There  is,  to  be  sure,  a  large 
constituency  among  the  well-to-do  whose  members  do  work 
for  their  living  and  get  a  return  which,  while  euphemis- 
tically termed  salary  or  income,  is  as  clearly  wages  as  is 
the  pay  of  the  day  laborer.  As  between  these  and  the 
prosperous  receivers  of  interest  and  rent  there  can  be 
nothing  in  the  way  of  a  predetermined  separation  of  the 
real  sources  of  income.  Even  as  between  the  manual  la- 


THE    ELASTICITY   OF    THE   WAGES    FUND. 


93 


borers  with  whom  the  word  wages  is  usually  associated, 
and  the  well-to-do  classes  who  are  separated  from  them 
by  habits  of  greater  ease  and  usually  higher  culture,  the 
line  of  cleavage  as  to  commodities  bought  is  not  unmis- 
takable. There  is  some  margin  of  interchangeable'  things, 
broader  or  narrower  according  to  the  more  or  less  demo- 
cratic character  of  the  society.  The  staples  of  food  are 
alike  for  nearly  all  the  members  of  the  advanced  commu- 
nities of  our  day,  and  many  materials  forming  a  large  part 
of  the  available  supplies  of  a  season  can  be  worked  up  in 
one  fashion  or  another  to  meet  at  short  notice  the  tastes 
of  the  eventual  consumers. 

Thus  \ve  find  again  limits  that  are  elastic,  not  rigid. 
The  total  real  income  of  the  community,  while  predeter- 
mined in  the  rough,  has  some  degree  of  elasticity.  The 
share  of  real  income  which  shall  go  to  wages  in  general, 
or  to  wages  of  the  great  mass  of  manual  laborers,  is  to  a 
certain  extent  predetermined  by  the  character  of  the  com- 
modities on  hand  or  in  the  making.  But  in  no  small  de- 
gree it  is  indistinguishable  and  inseparable,  forming  part 
of  a  mass  of  things  that  may  be  diverted  to  one  set  of 
persons  or  another  according  to  their  command  of  money 
income  for  the  time  being. 

The  question  has  sometimes  been  raised,  in  the  course 
of  the  controversy  over  the  wages  fund,  whether  laborers 
can  get  an  immediate  or  early  benefit  from  the  results  of 
improvements  made  at  the  time  when  their  wages  are 
earned.  On  the  one  hand,  it  has  been  maintained  that  a 
general  increase  in  the  productiveness  of  labor,  due  to 
advance  in  the  arts  or  to  greater  strenuousness  or  intel- 
ligence among  the  workmen,  inures  to  their  advantage  at 
once.  On  the  other  hand,  it  has  been  denied  that  they  can 
secure  an  immediate  gain.  In  essentials,  the  reasoning  of 
the  preceding  pages  clearly  supports  the  negative  answer. 
The  solid  effects  of  greater  efficiency  in  production  can 


94 


\VAGES   AND   CAPITAL. 


appear  only  after  the  interval  made  inevitable  by  the  com- 
plex and  slow-working  machinery  of  production.  Improve- 
ments now  made  do  not  inure  to  the  benefit  of  present 
real  wages :  always  subject  to  what  has  been  said  as  to 
the  degree  of  elasticity  which  does  exist  in  the  sources 
of  real  income.  But  this  holds  good  of  wages,  simply 
because  it  holds  good  of  all  real  income.  It  is  the  total 
volume  of  ripening  real  income  which  is  determined  by 
the  causes  of  the  past.  Advances  in  the  arts  increase  the 
total  more  or  less  rapidly,  according  to  the  point  at 
which  they  take  effect  in  the  successive  stages  of  produc- 
tion and  the  extent  to  which  they  require  a  larger  supply 
of  supplementary  tools  or  materials  for  their  full  fruition. 
It  would  be  a  rare  case  in  which  a  considerable  interval 
must  not  elapse  before  a  sensible  effect  on  the  flow  of 
consumable  commodities  could  appear.  If  the  extreme 
case  of  a  sudden  doubling  of  all  productive  efficiency  be 
supposed,  it  may  be  said  with  confidence  that  laborers 
and  others  would  not  receive  at  once,  or  for  some  little 
time  to  come,  a  double  portion  of  real  income. 

There  is  another  possibility,  and  a  significant  one,  of 
more  practical  importance  in  regard  to  other  forms  of  in- 
come than  those  usually  called  wages,  but  not  without  its 
importance  for  wages  also.  It  has  been  assumed  hitherto 
that  money  income  is  spent  as  soon  as  received,  and  goes 
at  once  to  the  purchase  of  consumable  commodities.  But 
purchases  may  be  postponed  and  savings  made:  a  modifi- 
cation in  the  assumed  conditions  which  we  may  now  pro- 
ceed to  consider. 

The  simplest  form  of  saving  is  hoarding;  and  it  is  an 
easy  matter  to  trace  the  modifications  which  would  ensue 
from  hoarding.  The  real  income  for  labor  comes  when  the 
money  income  is  spent.  If  it  is  spent  a  year  after  the  work 
is  done,  the  consumable  commodities  then  existing  are  the 


THE    ELASTICITY   OF    THE    WAGES    FUND. 


95 


source  of  real  income.  In  the  meanwhile,  some  of  these 
commodities  may  have  become  more  abundant  and  cheap- 
er ;  in  which  case  wages,  as  to  the  part  postponed,  are 
subject  to  the  conditions  of  supply  of  the  later  date,  not 
to  those  existing  at  the  time  when  the  work  was  done. 
So  far  as  the  conversion  of  money  wages  into  real  wages 
is  put  off,  the  laborers  thus  have  a  clear  field  for  par- 
ticipation in  the  results  of  improvements  going  on  while 
they  work,  or  in  those  of  greater  strenuousness  of  their 
own  labor. 

But  the  usual  form  of  saving  in  modern  communities  is 
investment,  not  hoarding.  Investment  means,  not  a  post- 
ponement of  all  purchases,  but  only  a  postponement  of 
direct  purchases  for  immediate  enjoyment.  Through  one 
or  another  of  the  many  channels  which  modern  society 
offers,  the  funds  saved  are  turned  over  to  the  active  man- 
agers of  industry  :  through  the  savings  bank  of  the  poor, 
or  the  purchase  of  securities  by  the  well-to-do,  or  the 
operations  of  life-insurance  societies.  By  the  active  capi- 
talists who  thus  get  control  of  the  funds,  they  are  used 
for  the  purchase  of  materials,  plant,  labor,  as  their  judg- 
ment suggests.  They  are  additions  to  the  funds  that 
would  in  any  case  be  turned  in  these  directions  for  the 
maintenance  of  existing  capital.  They  go  in  part  to 
wages ;  and  in  so  far  they  are  not  abstracted  from  the 
money  income  which  goes  for  the  season  to  the  purchase 
of  finished  commodities,  but  simply  shifted  from  hand  to 
hand.  In  the  long  run,  indeed,  not  the  part  only,  but  the 
sum  total  of  the  invested  savings,  goes  to  wages,  by  a  suc- 
cession of  advances  to  labor;  but  this  holds  good  only 
of  the  operations  of  a  lengthened  cycle.  For  any  one 
season,  the  process  of  investment  means,  in  large  part, 
the  purchase  of  inchoate  wealth,  or  real  capital.  Such 
inchoate  wealth  is  usually  on  hand  to  meet  the  new  de- 
mand. Not  only  is  enough  being  produced  to  make  good 


96 


WAGES   AND   CAPITAL. 


the  waste  of  existing  capital  as  it  wears  away  or  becomes 
useless,  but  additional  supplies  of  real  capital  are  con- 
stantly being  made  in  our  modern  communities,  in  antici- 
pation of  the  fresh  accumulation  of  individual  capital. 
New  investment,  as  well  as  reinvestment,  takes  place  so 
regularly  that  the  concrete  change  in  the  community's 
possessions'  has  usually  taken  place  before  the  decisive 
committal  of  his  means  to  accumulation  has  been  made 
by  the  individual  investor.  Saving  thus  usually  means  a 
transfer  of  purchasing  power  from  the  immediate  receiver 
of  money  income  to  other  hands.  Partly  it  means  a  trans- 
fer to  the  laborers  whom  the  managing  capitalists  may 
employ  with  the  additional  funds,  and  thus  a  simple  shift 
in  the  demand  for  consumable  goods;  partly  it  means 
the  buying  of  tools  and  materials,  and  so  a  real  post- 
ponement, for  the  time  being  at  least,  of  any  purchase  of 
enjoyable  things  at  all. 

As  to  the  individual  saver,  the  postponement  is  usually 
permanent.  He  does  not  ordinarily  avail  himself  of  the 
recurrent  opportunity  for  spending  which  comes  as  the 
loans  made  to  the  active  managers  fall  due.  He  reinvests, 
repeating  the  decision  to  save.  He  spends  only  the 
money  income  handed  over  to  him  as  interest  on  his  accu- 
mulations. With  this  he  becomes  each  year  (assuming 
that  he  does  not  again  save  out  of  income)  a  purchaser  of 
real  income,  and  a  sharer  in  the  inflowing  supplies  of  con- 
sumable goods.  The  quantity  and  quality  of  these  sup- 
plies may  vary  from  year  to  year,  and  the  possibilities  of 
his  real  income  may  thus  vary.  But  so  far  as  the  reward 
for  his  labor  is  concerned,  he  is  independent  of  those 
present  limitations  on  real  income  which  we  have  found 
to  exist  for  such  as  spend  their  whole  money  income  at 
once  for  the  satisfaction  of  immediate  wants. 

How  great  is  the  importance  of  this  additional  element 
of  elasticity  in  the  real  reward  of  labor  must  depend  on 


THE    ELASTICITY   OF    THE    WAGES    FUND. 


97 


the  extent  to  which  savings  are  in  fact  made  from  money 
wages.  As  to  the  great  mass  of  hired  laborers,  and  even 
the  great  mass  of  those  independent  workmen,  in  agricul- 
ture and  in  the  crafts,  to  whom  also  we  commonly  apply 
the  term  wages,  the  savings  are  probably  very  small  as 
compared  with  their  total  earnings.  More  especially  is 
this  the'case  with  hired  laborers.  It  is  true,  the  accumu- 
lations in  the  savings  banks  of  the  more  advanced  coun- 
tries form  an  imposing  mass  ;  but  they  are  to  be  compared 
with  the  much  more  imposing  mass  of  the  total  earnings 
of  the  laborers.  They  come  only  in  part  from  savings 
by  receivers  of  wages;  and  in  any  case  they  are  small  as 
compared  with  the  whole  sum  which  is  paid  in  wages.  It 
can  not  be  far  from  the  truth  to  say  that  virtually  the 
whole  of  the  wages  of  hired  manual  laborers  is  spent  at 
once  on  consumable  commodities,  and  therefore  is  subject 
to  the  causes  by  which  the  supply  of  consumable  com- 
modities is  so  largely  predetermined. 

The  class  in  society  as  to  whom  the  fact  of  saving  is 
of  most  importance  is  that  of  the  successful  managing 
capitalists  or  business  men.  It  is  from  them  that  the 
largest  habitual  accumulations  of  capital  are  derived. 
Hired  laborers  may  save  a  bit  from  their  wages  ;  inde- 
pendent laborers,  when  prosperous,  may  save  a  bit  more. 
The  investor,  again,  getting  his  fixed  income  from  a  capi- 
tal which  is  expected  to  remain  intact,  is  likely  to  put 
aside  only  a  small  part  of  his  receipts.  The  professional 
classes  of  lawyers,  physicians,  and  the  like,  do  indeed 
usually  save  some  considerable  proportion  of  their  in- 
come. But  the  active  managers  of  industry,  more  than 
any  other  set  of  men,  find  the  main  object  of  their  ambi- 
tion and  the  one  test  of  their  success  in  "  making  money  "  ; 
in  acquiring  larger  money  rights  than  they  spend;  in 
accumulating,  and  in  adding  to  their  possessions.  The 
prosperous  business  man  sets  aside  for  the  enlargement 


98  WAGES   AND   CAPITAL. 

of  his  wealth  a  greater  proportion  of  his  income  than  any 
other  member  of  society;  and  of  the  total  accumulations 
of  fresh  capital  for  the  community,  the  greatest  part  prob- 
ably comes  from  the  eagerness  of  this  class  to  acquire 
permanent  wealth.  While  he  is  still  in  harness,  the  posses- 
sions of  the  active  capitalist  usually  consist  in  large  part 
of  inchoate  wealth  directly  owned,  and  of  claims- against 
fellow  business  men,  offset  more  or  less  by  cross-claims; 
the  whole  having  an  uncertain  value,  depending  on  the 
outcome  of  the  operations  still  in  progress.  Each  one, 
as  he  reaches  the  point  (if  ever  he  reaches  it)  where 
he  thinks  he  has  a  competency,  begins  to  wind  up  his 
enterprises,  converts  his  possessions  mainly  into  obliga- 
tions due  him  by  those  who  are  still  active  in  business, 
and  retires  to  the  position  of  a  dependent  investor.  If  he 
does  not  retire  himself,  his  children  are  likely  to  do  so. 
The  existing  generation  of  active  capitalists  gives  way 
to  a  new  generation,  equally  intent  on  large  gains  and 
large  accumulations. 

The  fact  of  saving  and  postponed  enjoyment  thus 
leads  to  qualifications  of  our  main  conclusions  chiefly  in 
regard  to  the  well-to-do  classes,  and,  among  those,  most 
strikingly  in  regard  to  the  successful  business  man.  Those 
who  save  are/re>  tanto  free  from  the  conditions  of  present 
supply  which,  within  greater  or  smaller  limits,  cause  the 
available  real  income  of  all  classes  in  society  to  be  in 
some  degree  predetermined.  The  largest  savers  and  the 
largest  accumulators  of  capital  are  the  successful  men  of 
affairs.  These,  then,  may  be  said  in  a  sense  to  have  the 
most  elastic,  the  least  predetermined,  real  reward  for  their 
labor. 

It  need  not  be  remarked  that,  in  speaking  of  a  prede- 
termination of  any  sort,  as  to  wages  or  any  form  of  in- 
come, reference  is  made  to  wages  in  the  mass,  or  other  in- 
come in  the  mass.  To  say  that  the  real  wages  of  any 


THE   ELASTICITY   OF   THE   WAGES   FUND.          99 

particular  set  of  laborers  are  predetermined,  would  be  an 
entirely  different  proposition.  The  whole  wages  fund  dis- 
cussion,— the  whole  discussion  of  the  relation  of  capital 
to  wages  or  other  forms  of  income, — applies  to  the  gen- 
eral phenomenon,  not  to  the  particular.  But  of  this  quali- 
fication or  explanation  more  will  be  said  in  the  next  and 
concluding  chapter,  whose  object  it  will  be  to  make  clear, 
in  other  respects  also,  the  scope  and  significance  of  the 
conclusions  that  have  been  reached. 


CHAPTER   V. 

SOME    CONCLUSIONS. 

THE  wages  fund  doctrine  proper  has  now  been  done 
with,  and,  strictly,  the  end  of  our  task  has  been  reached. 
But  there  are  some  aspects  of  distribution  at  large  so 
closely  connected  with  the  pros  and  cons  of  the  wages  fund 
controversy  that  they  come  within  the  scope  even  of  an 
inquiry  directed,  as  this  is,  to  a  very  limited  part  of  the 
general  subject.  There  are  some  questions,  also,  as  to 
the  practical  bearings  of  the  discussion  and  its  outcome, 
which  call  for  careful  consideration.  These  somewhat  dis- 
connected topics  will  serve  also  to  make  clear  the  signifi- 
cance and  limitations  of  the  conclusions  reached,  and  the 
kind  of  aid  which  a  discussion  of  the  wages  fund  question 
can  yield  to  economic  theory  in  general. 

It  will  be  convenient  to  begin  with  the  questions  as  to 
the  practical  bearing  of  the  conclusions  which  have  been 
reached  in  the  preceding  chapters.  The  general  reader, 
and  even  the  economist  most  intent  on  the  larger  gener- 
alizations of  his  subject,  will  not  fail  to  ask  himself,  what 
light  do  these  discussions  throw  on  living  subjects? 
What  help  do  they  give  in  reaching  answers  as  to  the  right 
and  wrong,  the  chances  of  success  or  failure,  of  strikes 
and  lockouts  ?  What  basis  do  they  give  for  settling  dis- 
putes by  arbitration  or  conciliation  ? 

It  may  be  said  at  once  that  the  answer  must  be  a  dis- 
appointing one.  The  conclusions  of  the  economist  as  to 

100 


SOME   CONCLUSIONS.  IOi 

the  theoretical  relations  of  wages  and  capital  have  lit- 
tle or  no  bearing  on  the  disputes  between  laborers  and 
capitalists  as  they  usually  appear  in  the  specific  case. 
Though  students  of  economic  principles  may  see,  without 
further  discussion,  the  meaning  and  justification  of  this 
apparently  paradoxical  answer,  a  more  detailed  explana- 
tion may  not  be  unwelcome  to  one  or  another  set  of 
readers. 

Something  was  said,  in  the  last  chapter,  as  to  the 
elasticity  of  the  sources  whence  wages  come,  and  as  to 
the  possibility  of  an  immediate  general  rise  at  any  given 
moment.  The  conclusion,  whether  as  to  money  wages  or 
real  wages,  was  against  any  rigid  predetermination  of  the 
funds  whence  the  total  wages  of  a  given  period  are  de- 
rived. But,  as  was  then  noted,  this  result  is  of  value  rather 
as  illustrating  the  significance  and  the  limitations  of  our 
general  reasoning,  than  as  answering  any  questions  likely 
to  arise  in  specific  form.  The  attempt  at  a  simultaneous 
advance  in  wages  all  along  the  line  never  is  made.  An 
all-inclusive  combination  of  hired  laborers  (and  to  their 
case,  for  obvious  reasons,  the  discussion  can  be  confined) 
is  not  indeed  inconceivable  or  impossible,  but  it  is  in  the 
highest  degree  improbable.  What  takes  place  in  fact  in 
the  dealings  of  workmen  with  their  employers  is  a  succes- 
sion of  isolated  bargains  and  struggles.  First  one  set  of 
laborers,  then  another,  strives  for  an  advance  ;  the  prac- 
tical question  is  as  to  the  limits  and  obstacles  which  may 
be  encountered  by  such  separate  endeavors. 

It  did  indeed  occur,  in  the  older  literature  of  our  sub- 
ject, that  this  sort  of  case  was  considered  with  reference 
to  the  relations  of  wages  and  capital  in  general.  It  was 
sometimes  said  that,  while  the  laborers  of  a  particular 
trade  might  very  possibly  get  an  advance  of  wages  in 
consequence  of  a  union  and  a  strike,  the  advance  would 
take  so  much  more  out  of  the  general  wages  fund,  and 


I02  WAGES   AND   CAPITAL. 

would  thus  be  secured  at  the  expense  of  the  rest  of  the 
laborers.  Such  reasoning  proceeded  on  the  basis  of  a 
fixed  fund,  unalterable  at  the  moment,  whence  alone  la- 
borers could  be  paid;  it  followed  that  if  some  got  more, 
others  must  get  less.  It  was  not  often  made  clear  whether 
a  money  wages  fund  or  a  real  wages  fund  was  had  in 
mind  ;  nor  was  it  explained  how  long  the  offsetting  loss 
would  continue,  or  what  forces  might  tend  to  makeJt 
endure  or  disappear.* 

Some  degree  of  theoretic  truth  there  may  be  in  this 
reasoning.  The  reader  will  remember  that  while  the 
source  of  wages,  whether  of  money  wages  or  of  real  wages, 
is  elastic,  it  is  elastic  within  limits.  It  is  then  true  that 
a  very  great  rise  in  the  reward  of  a  considerable  set  of 
laborers  would  take  place,  at  least  for  a  while,  to  the 
detriment  of  other  laborers.  As  to  money  wages,  the 
funds  which  the  body  of  employers  can  turn  to  the  hire 
of  laborers  are  not  indeed  rigidly  predetermined.  They 
can  be  stretched  to  a  certain  extent,  and  can  meet  some 
new  demands  without  curtailment  in  other  directions ; 
but  any  very  great  increase  in  the  funds  turned  over  to 
one  group  of  laborers,  carried  far  enough,  must  diminish 
those  which  go  to  the  rest.  The  case  with  real  wages, 
while  presenting  some  variations,  is  in  essentials  the  same. 
The  flow  of  consumable  goods  whence  all  real  income, 
whether  wages  or  any  other  form  of  return,  must  come, 
is  similarly  elastic  within  limits.  A  rise  in  the  money 
wages  of  a  given  group  (taking  place' very  possibly  with- 
out a  diminution  in  the  money  wages  of  others)  would 
bring  an  increase  in  the  total  purchases  of  commodities 
by  consumers.  True,  the  new  demand,  if  not  very  great, 
could  be  met  by  some  hastening  and  stretching  of  the 

*  An  uncriuivoc.il  example  of  this  sort  of  reasoning  is  in  Mill's  Polit- 
ical Economy  ;  see  the  discussion  of  the  passage  infra  at  pp.  233-235. 


SOME   CONCLUSIONS. 


103 


existing  supplies  of  goods  nearly  finished  or  half  finished. 
On  the  other  hand,  if  any  large  group  of  laborers  suddenly 
had  the  means  of  buying  much  more  than  before, — so  much 
more  that  no  stretching  of  the  commodities  available 
would  suffice  to  meet  their  added  demands, — less  would  be 
left  for  the  others.  Only,  in  this  case,  the  losers  would 
not  necessarily  be  other  laborers;  they  might  be  any  re- 
ceivers of  money  income.  Who  would  lose,  would  thus 
depend  on  the  kind  and  amount  of  commodities  which  are 
bought  with  their  new  money  means  by  the  fortunate 
laborers,  and  on  the  response  of  prices  and  supplies  to 
their  new  demand. 

These  conclusions  are  of  the  hopelessly  inexact  sort 
which  exasperate  the  practical  man,  desirous  of  answers 
so  precise  as  to  admit  of  immediate  concrete  application. 
No  one  can  say  whether  an  advance  of  five,  or  ten,  or 
twenty  per  cent  in  the  wages  of  all  the  employees  in  tex- 
tile industries,  would  cause  a  diminution  either  of  money 
wages  or  of  real  wages  for  the  rest  of  the  laborers. 
To  draw  an  exact  line, — to  say  that  so  many  millions  of 
dollars  and  so  many  tons  of  goods,  so  much  and  no  more, 
can  be  got  without  passing  beyond  the  elastic  limits  of 
the  general  sources, — this  is  impossible.  But  it  is  safe  to 
say  that  in  concrete  life  it  happens  very  rarely,  probably 
never,  that  a  specific  rise  in  wages,  secured  by  strike  or 
trades-union  pressure  or  simple  agreement,  can  be  shown 
to  bring  any  offsetting  loss  in  the  wages  of  those  not 
directly  concerned.  The  sums  involved  in  any  particular 
case,  though  they  may  be  absolutely  large,  are  small  in 
comparison  with  the  total  which  must  be  considered  if  the 
general  effects  are  to  be  examined.  A  rise  of  ten  per 
cent  in  the  wages  of  coal  miners  or  of  iron  workers  may 
mean  a  matter  of  millions,  and  yet  is  only  a  small  fraction 
of  total  wages  payments  and  of  total  purchases  of  real  in- 
come by  consumers  at  large.  The  chances  are  that  such 


IO4 


WAGES   AND   CAPITAL. 


an  advance  would  bring  real  gain  to  the  laborers  in- 
volved, without  loss  to  any  of  their  fellows.  Doubtless, 
if  all  the  consequences  of  the  change  could  be  infallibly 
traced,  some  justification  for  the  misgivings  of  the  writers 
of  the  older  school  might  be  found.  It  might  appear  that 
the  immediate  employers  were  crippled  by  the  added  ex- 
penses, and  had  less  to  spend  in  hiring  other  sorts  of  work' 
men ;  or  that  the  banks,  which  advanced  them  the  funds 
for  this  expense  among  others,  had  less  to  lend  to  other 
employers.  These  are  possibilities  of  the  sort  which  the 
ultra-conservative  would  be  disposed  to  make  much  of. 
But  it  is  out  of  the  question  in  any  concrete  case  to  fol- 
low all  the  might-have-beens,  or  trace  the  have-beens  in 
their  rapid  interlacing  with  other  forces  and  events.  The 
chances,  to  repeat,  are  against  any  traceable  loss  which 
would  offset  the  visible  gain.  Certainly  an  unbiased  and 
judicious  adviser,  having  the  interest  of  all  laborers  at 
heart,  would  hesitate  long  before  counselling  any  particu- 
lar set  of  laborers  against  an  endeavor  to  get  better  terms 
from  their  employers,  on  the  ground  that  as  an  ulterior 
result  of  success,  some  of  their  fellows  might  suffer.  If 
no  other  objection  than  this  presented  itself,  he  could  safely 
assert  that  economic  science  had  nothing  to  say  against 
their  endeavors,  and  much  in  favor  of  them. 

The  substantial  obstacles  which  may  prevent  a  rise  in 
wages  are  to  be  found  in  another  direction.  The  man  of 
affairs  would  say  that  the  success  of  a  move  for  higher 
wages  depended  on  the  state  of  trade  and  prices.  The 
economist  would  say  the  same  thing  in  different  language, 
by  laying  it  down  that  consumers'  demand,  or  demand  for 
commodities,  mainly  determined  the  share  of  income  which 
could  be  got  by  any  one  group  of  laborers.  Let  us  follow 
in  brief  review  the  chain  of  forces  which  would  come  into 
play  in  such  a  case. 

Proximately.  the  success  or  failure  of  an  attempt  to 


SOME    CONCLUSIONS. 


105 


get  higher  wages  will  depend  much  on  the  accidents  of 
the  particular  situation.  The  extent  to  which  the  em- 
ployers happen  at  the  moment  to  be  tied  by  contracts  ;  the 
temper  or  pugnacity  of  one  party  or  the  other  ;  the  organ- 
ization, the  discipline,  the  available  funds  on  either  side, 
— such  surface  causes  may  decide  the  outcome  in  any 
given  case.  Forces  of  this  sort  are  too  often  forgotten 
by  the  economists,  intent  as  they  are  on  the  deeper  cur- 
rents of  the  industrial  stream. 

Even  the  forces  next  in  order,  likely  to  be  referred  to 
by  the  thoughtful  man  of  affairs  and  the  well-informed 
financial  writer,  are  often  neglected  by  the  economists. 
The  cautious  everyday  observer  would  describe  these  less 
accidental  causes  by  saying  that  the  success  of  the  labor- 
ers' effort  depended  on  the  state  of  the  market :  whether 
sales  and  profits  were  such  as  to  make  the  employer  prefer 
the  additional  expense  of  a  higher  wages  bill  to  the  loss  of 
a  satisfactory  season's  trade.  This,  again,  must  depend 
largely  on  the  expectations  and  previsions  of  the  larger 
body  of  active  capitalists  of  whom  the  direct  employers 
are  but  one  part.  If  the  merchants,  speculators,  bankers, 
lenders,  are  all  hopeful  and  eager,  then  trade  will  be  good 
and  the  workmen  may  get  a  substantial  slice  of  the  profits 
of  good  times.  Their  share  would  probably  be  substan- 
tial, because  not  likely  to  go  beyond  the  limits  to  which 
the  real  wages  fund  of  available  commodities  could  be 
stretched,  and  because  they  are  likely  to  spend  at  once 
and  so  convert  their  money  gains  into  immediate  real  en- 
joyment ;  whereas  their  employers,  who  habitually  post- 
pone the  fruition  of  a  large  part  of  their  income,  may  be 
overtaken  by  a  financial  revulsion  before  realizing  and 
pocketing  their  profits. 

Beyond  such  a  stage  as  this  in  the  play  of  social  forces, 
the  calculations  and  prophecies  of  those  immediately  con- 
cerned, whether  workmen  or  employers,  do  not  usually 


I06  WAGES   AND   CAPITAL. 

go.  Only  the  most  shrewd  and  thoughtful  among  them 
will  go  a  step  further,  and  point  out  that  in  the  end  the 
success  of  any  particular  group  of  workmen  in  perma- 
nently retaining  a  substantial  advance  in  wages  must  de- 
pend on  whether  the  consumers  of  the  goods  they  make 
can  and  will  pay  more  for  them.  The  economist  will  say 
the  same  thing,  though  probably  with  a  more  distinct  con- 
ception of  who  are  consumers  and  what  constitutes  con- 
sumers' demand.  The  man  of  affairs  thinks  of  almost  any 
buyers  as  consumers :  the  woollen  manufacturer  is  a  con- 
sumer of  wool,  and  the  shivering  individual  who  buys  a 
coat  is  a  consumer  of  woollens.  The  careful  economist 
thinks  of  the  latter  alone, — of  the  person  who  "has  immedi- 
ate wants  to  satisfy,  who  weighs  one  want  against  another, 
and  is  in  truth  the  only  real  consumer.  His  purchases  are 
made  at  the  counter  of  the  retail  shopkeeper.  Evidently 
he  is  separated  by  a  long  and  complicated  series  of  middle- 
men from  the  various  workmen  whose  successive  efforts 
have  combined  in  producing  the  final  enjoyable  commod- 
ity. Whether  his  demand  is  such  as  to  make  possible  a  rise 
in  the  wages  of  some  or  all  of  the  workmen  who  have  so 
combined,  is  to  be  ascertained  not  by  the  ups  and  downs 
of  a  season  or  two,  but  by  a  stretch  of  experience  which 
to  the  man  of  business  seems  of  secular  length.  The 
economists  who  have  insisted  on  consumers'  demand  as  a 
determining  cause  or  source  of  wages  have  not  always  set 
forth  with  sufficient  emphasis  the  distance  between  the 
consumer  and  the  chain  of  producers  who  combine  to  work 
for  him.  They  have  spoken  of  consumers'  demand  as  a 
cause  closely  affecting  wages, — misled  perhaps  by  an  un- 
conscious confusion  between  proximate  purchasers  and 
ultimate  consumers.  But  it  remains  true  that,  in  the  end, 
the  wages  which  any  particular  group  of  workmen  can  get 
depend  on  what  the  consumers  are  able  and  willing  to  pay 
for  the  commodities  produced,  and  that  a  real,  steady,  and 


SOME   CONCLUSIONS. 


lO/ 


permanent  rise  in  wages  can  be  got  by  such  a  group  only 
if  the  permanent  conditions  of  the  market — that  is,  of  ulti- 
mate demand — are  favorable  to  them. 

Something  more  will  be  said  of  consumers'  demand  in 
another  place.  This  factor  in  the  situation  has  played  a 
curious  and  interesting  part  in  the  development  of  eco- 
nomic thought,  elsewhere  to  be  considered  in  detail.* 
Here  it  will  suffice  to  point  out,  what  follows  clearly 
enough  from  the  reasoning  of  the  preceding  chapters,  that 
it  bears  only  on  the  wages  obtainable  by  a  particular  set 
of  laborers.  The  older  economists  had  a  fashion  of 
expounding  with  elaborate  emphasis  the  theorem  that 
demand  for  commodities  was  not  demand  for  labor,  but 
only  determined  the  direction  of  the  demand  for  labor. 
They  were  right,  even  though  they  put  their  theorem  in 
terms  and  with  applications  that  made  the  result  seem 
paradoxical  to  the  practical  man.  Consumers'  demand, 
or  demand  for  commodities,  is  the  important  force  to  be 
considered  when  we  inquire  whether  and  how  a  given  set 
of  workmen  can  get  better  wages, — whether  more  money 
wages,  or  their  probable  concomitant  of  more  real  wages. 
This  is  the  last  force  involved  in  the  specific  struggles  of 
the  industrial  world  ;  for  in  practise  we  do  not  meet  the 
attempt  at  a  general  advance  in  all  wages.  Yet  the  gen- 
eral advance  alone  would  involve  those  wider  questions 
as  to  the  source  of  wages  at  large,  and  the  relation  of  all 
wages  to  capital,  which  form  the  subject  of  the  wages 
fund  controversy.  The  form  in  which  the  concrete  social 
question  appears  is  in  the  efforts  of  this  or  that  set  of 
particular  workmen,  whose  success  will  depend  on  the 
factors  of  closer  or  remoter  operation  which  have  just 
been  described  :  on  the  accidents  of  the  moment,  on  the 
state  of  trade,  on  consumers'  demand. 

*  See  Part  II,  Chapter  XIII. 


I08  WAGES   AND   CAPITAL. 

This  analysis  would  need  to  be  pushed  still  further  if 
all  the  problems  involved  were  to  get  their  due  share  of 
attention.  Back  of  consumers'  demand  there  are  other 
forces,  or  other  phases  of  the  same  forces.  Consumers' 
demand,  or  the  play  of  supply  and  demand  as  to  enjoy- 
able commodities,  can  be  translated  into  terms  of  final 
utility,  and  can  lead  to  that  psychological  analysis  which 
has  played  so  large  a  part  in  recent  economic  discussion. 
On  the  other  hand,  the  extent  to  which  laborers  or  their 
children  can  transfer  their  exertions  from  one  industrial 
group  to  another;  the  nature  and  permanence  of  the  ob- 
stacles in  the  way  of  such  transfer ;  the  chances  of  an 
eventual  equalizing  tendency,  if  the  conditions  of  con- 
sumers' demand  have  raised  or  lowered  the  returns  of  any 
one  group, — here  are  other  important  aspects  of  the  case. 
According  as  we  do  or  do  not  conclude  that  an  equalizing 
process  exists,  we  get  a  different  result  as  to  the  ultimate 
determining  causes  of  the  exchange  values  of  commodi- 
ties.* Every  phase  of  the  most  intricate  problems  of  value, 
as  well  as  of  production  and  distribution,  would  thus  pre- 
sent itself  before  the  final  answer  could  be  given  to  the 
questions  raised  by  those  successive  isolated  contests  be- 
tween laborers  and  employers  which  are  carried  on  in  the 
actual  world. 


*  If  there  is  effective  movement  from  group  to  group  among  laborers, 
value  is  determined  in  the  end  primarily  by  the  sacrifice  involved  in 
labor,  that  is,  by  real  cost  of  production  ;  while  relative  wages  depend 
on  the  intrinsic  attractiveness  of  different  sorts  of  work.  If  there  is  not 
effective  movement  from  group  to  group,  value  and  relative  wages  are 
both  determined  in  the  end  by  the  final  utility  of  the  consumable  com- 
modities produced.  In  the  recent  discussions  of  the  fundamental  laws 
of  value,  the  important  bearing  of  the  presence  or  absence  of  free  choice 
of  occupation  by  laborers  has  been  strangely  neglected.  But,  to  repeat 
what  is  said  in  the  text,  questions  of  this  sort, — perhaps  the  most  difficult 
which  the  economist  has  to  deal  with, — carry  us  far  from  the  immediate 
relation  of  capital  and  wages. 


SOME   CONCLUSIONS. 


109 


All  this,  however,  would  carry  us  further  and  further 
from  the  subject  in  hand,  and  the  object  of  the  digression 
into  the  field  of  particular  wages  and  of  value  has  per- 
haps  been  sufficiently  attained.  As  the  causes  that  affect 
the  share  of  income  and  enjoyment  accruing  to  particular 
classes  of  society  are  different  from  those  that  affect  the 
income  of  society  as  a  whole,  so  the  causes  that  deter- 
mine the  share  which  a  particular  set  of  laborers  shall 
have  are  different  from  those  that  determine  the  total 
that  goes  to  laborers  as  a  whole.  It  is  only  with  the 
total  that  the  wages  fund  or  the  discussion  of  wages  and 
capital  has  to  do.  In  the  nature  of  the  case,  the  practical 
questions  and  the  concrete  social  problems  which  press 
for  immediate  attention  are  more  likely  to  be  of  the  par- 
ticular sort.  They  are  questions  as  to  the  wages  of  one 
trade,  one  group,  one  district  ;  struggles  between  the  em- 
ployers and  workmen  of  a  given  time  and  place,  affected 
by  the  accidents  of  temper,  and  the  turns  of  trade  often 
no  less  accidental,  as  well  as  by  the  remoter  operation  of 
consumers'  demand  and  final  utility.  On  such  topics  the 
economist  is  not  helpless  ;  he  may  be  able  to  give  judi- 
cious advice,  or  at  all  events  to  bring  a  calm  and  far- 
seeing  mind  to  the  consideration  of  the  particular  case. 
But  the  wages  fund,  and  the  theoretical  relations  of  wages 
and  capital,  will  not  help  him  at  all. 

We  may  pass  now  to  the  other  group  of  topics  men- 
tioned at  the  beginning  of  this  chapter;  namely,  as  to 
the  connection  between  the  wages  fund  controversy  and 
some  wider  questions  as  to  distribution.  The  relation  of 
capital  to  wages  has  been  much  discussed,  in  recent  years, 
in  close  association  with  another  important  subject, — the 
precise  manner  in  which  the  machinery  of  distribution 
works,  and  more  particularly  the  sense  in  which  one  or 
another  share  is  to  be  regarded  as  residual.  Here  also 


IIO  WAGES   AND   CAPITAL. 

the  inquiry  will  lead  to  subjects  far  removed  from  that  of 
the  present  essay  :  serving  again  to  illustrate  the  limita- 
tions rather  than  the  applications  of  its  main  conclusions. 

A  brief  historical  sketch  will  most  conveniently  intro- 
duce this  part  of  the  discussion.  In  the  Ricardian  analy- 
sis of  distribution,  profits  were  the  residual  element.  Rent 
was  fixed,  very  simply,  by  the  differences  between  the  nat- 
ural sites  in  use.  Wages,  determined  in  the  first  instance 
by  the  ratio  of  capital  to  population,  were  fixed  over  any 
period  but  the  shortest,  by  the  standard  of  living  or  by 
what  was  "  necessary  "  to  maintain  the  laborers.  Profits 
got  the  rest,  and  thus  were  the  residual  element  in  dis- 
tribution ;  profits  meaning  what  was  got  by  capitalists 
actively  engaged  in  the  conduct  of  industry.  In  the  long 
run  profits  would  doubtless  be  affected  by  the  rate  of  ac- 
cumulation, and  by  the  disposition  of  capitalists  to  accept 
a  larger  or  smaller  reward  ;  but  this  only  by  a  slow-work- 
ing process.  Virtually,  profits  got  what  did  not  go  to 
wages  or  to  rent. 

As  time  went  on,  as  less  abstract  modes  of  investiga- 
tion made  their  way,  as  the  march  of  concrete  events 
brought  with  it  an  unmistakable  rise  in  general  wages,  a 
different  mode  of  describing  the  working  of  distribution 
was  gradually  adopted.  The  return  to  capital  was  de- 
scribed as  depending  on  the  effective  desire  of  accumula- 
tion, and  was  associated  more  closely  with  the  inactive 
investor  whose  revenue  conies  solely  and  simply  as  a 
recompense  for  saving  or  waiting.  Profits,  in  this  sense, 
being  fixed  by  the  strength  of  the  disposition  to  save, 
wages  became  more  variable,  and  got  the  benefit  of  any 
general  increase  in  the  output  of  industry.  This  shift  in 
the  point  of  view  was  introduced  insensibly,  and  at  first 
without  any  change  in  the  old  doctrine  as  to  the  payment 
of  wages  from  capital  ;  the  change  being  simply  in  the  as- 
sumption that  the  amount  of  capital  turned  over  to  la- 


SOME   CONCLUSIONS.  Iir 

borers  accommodated  itself  quickly  and  easily  to  varia- 
tions in  what  the  laborers  produced.* 

Next,  when  the  wages  fund  doctrine  had  been  ef- 
fectively attacked  and  undermined,  it  was  a  natural  step 
to  describe  the  laborers,  already  given  a  residual  posi- 
tion in  essentials,  as  the  direct  and  immediate  receivers  of 
so  much-  of  the  product  of  industry  as  did  not  go  else- 
where. The  other  sharers  got  parts  sliced  off  in  accord 
with  principles  supposed  to  be  settled.  The  receivers  of 
wages  were  then  the  residual  holders  in  the  distribution 
of  total  income,  with  or  without  a  further  carving-out  of 
employers'  profits  from  the  general  mass.  Thus  we  have 
the  residual  theory  of  wages,  which  during  the  last  ten 
years  has  been  so  much  in  vogue. 

But  if  the  description  of  the  machinery  of  distribution 
given  in  the  preceding  pages  is  accurate,  this  new  version 
of  the  industrial  situation  is  not  tenable;  not  tenable, 
that  is,  as  a  description  of  the  facts  of  modern  industry. 
More  especially,  it  is  not  in  accordance  with  the  facts  of 
that  case  which  is  chiefly  had  in  mind  by  every  one  who 
discusses  the  economics  of  modern  times, — the  regime  of 
employing  capitalists  and  hired  workmen. 

We  have  seen  that,  directly,  the  hired  laborers,  and 
the  inactive  investors  as  well,  get  stipulated  money  shares. 
They  take  no  chances;  they  have  been  promised  so  much, 
and  so  much  they  receive, — barring  bankruptcy  on  the 
part  of  the  managing  employer.  Under  the  conditions 
which  prevail  so  preponderantly  in  the  modern  industrial 
world,  the  true  residual  sharer,  certainly  in  the  first  in- 
stance, is  the  active  capitalist,  the  business  man.  He  has 
made  his  bargains  for  stipulated  payments  to  investors 
and  to  laborers.  Usually  he  has  interlacing  obligations 
with  other  business  men  which  affect  his  operations,  past 

*  Compare  what  is  said  below.  Part  II,  Chapter  XII,  toward  the  end. 
9 


112  WAGES   AND   CAPITAL. 

and  future,  so  intricately  that  he  can  know  where  •  he 
stands  only  by  elaborate  and  sometimes  deceptive  book- 
keeping. Indeed,  he  rarely  knows  where  he  really  stands  : 
for  how  much  he  is  finally  to  secure,  depends  on  the  out- 
come of  operations  still  in  progress.  But  what  proves 
to  be  left  is  his  own.  He  wins  or  loses,  according  as  the 
industrial  venture  turns  out  well  or  ill.  Doubtless  what 
he  finally  gets,  or,  in  the  phrase  of  the  business  world, 
what  he  makes,  is  not  a  simple  income  such  as  the  econo- 
mist of  the  present  day  would  label  with  a  single  word. 
Ricardo  would  have  called  it  profits,  simply.  A  writer  of 
the  present  generation  would  describe  it,  with  a  view  to 
final  classification  and  explanation,  as  consisting  partly  of 
interest  on  his  own  capital  invested,  partly  of  wages  for 
work  done;  these  wages,  again,  being  susceptible  of  elab- 
orate analysis,  according  to  distinctions  sometimes  sub- 
stantial and  sometimes  fanciful.  But,  however  classified, 
and  however  susceptible  or  unsusceptible  of  accurate 
measurement  at  any  given  time,  the  income  of  the  season 
appears  as  a  net  sum,  the  residual  outcome  of  the  opera- 
tions of  the  season.  The  hired  laborer  gets  his  fixed 
wages,  the  investor  his  stipulated  income  :  the  managing 
business  man  takes  the  rest. 

No  doubt,  as  to  independent  laborers,  the  description 
of  their  situation 'as  residual  is  accurate;  but  it  fits  the 
case,  not  because  they  are  laborers,  but  because  they  are 
independent  producers.  They  are  owners  of  part  of  the 
gross  output  of  society.  They  sell  what  they  turn  out, 
and  so  become  holders  in  the  first  instance  of  part  of  the 
money  income  of  society.  They  may  have  wages  to  pay, 
or  interest  or  rent  to  meet:  what  is  left  is  then  their  own. 
In  their  case,  as  in  that  of  their  fellow  business  managers 
on  a  larger  scale,  the  gains  received  may  be  resolvable, 
when  analyzed  with  regard  to  permanent  causes,  into 
wages  and  interest  and  rent.  It  may  be  a  question,  too, 


SOME   CONCLUSIONS.  n$ 

how  far  the  returns  for  labor,  which  are  received  by  the 
petty  independent  workmen,  are  in  essentials  similar  to 
the  wages  of  the  hired  laborers,  and  how  far  they  are 
to  be  classed  with  the  net  returns  for  work  which  the 
great  employers  earn.  But  their  place  in  the  direct  pro- 
cess of  distribution  is  the  same  as  that  of  the  business 
man  with  whom  business  earnings  or  business  profits  are 
usually  associated. 

If,  then,  setting  aside  the  case  of  the  independent  work- 
man carrying  on  operations  in  such  small  ways  as  to  de- 
prive him  of  the  dignity  of  the  capitalist's  place,  we  attend 
to  that  part  of  the  community's  industry  which  is  con- 
ducted on  a  large  scale  by  business  managers,  we  have  a 
result  bearing  some  surface  resemblance  to  Ricardo's. 
The  net  gains  of  this  class,  which  he  called  profits,  are  the 
direct  residual  element.  The  resemblance  to  Ricardo's 
version  of  the  case,  however,  is  obviously  more  apparent 
than  real.  He  reached  his  conclusions  by  reasoning  which 
assumed  wages  to  be  fixed  and  unvarying :  and  the  resid- 
ual position  of  profits  held  good,  if  not  as  the  definitive 
outcome  of  distribution,  at  least  for  very  considerable 
periods.  In  the  reasoning  just  set  forth  that  residual 
position  is  assigned  to  the  business  manager  simply  in  the 
first  stage  of  distribution  :  in  the  division  of  that  money 
income  which  is  the  first  step  toward  the  concrete  assign- 
ment to  one  hand  or  to  another  of  the  real  income  of  the 
community. 

So  much  is  direct  and  unquestionable  fact.  If  it  be 
maintained  that  the  independent  producer, — that  is,  under 
typical  modern  conditions,  the  managing  capitalist, — is  not 
the  residual  sharer  of  the  social  income,  regard  must  be 
had  to  some  other  than  the  first  steps  in  distribution, — to 
some  later  and  more  obscure  steps.  But  in  analyzing 
such  further  steps,  it  is  indispensable  to  keep  close  to  the 
facts  of  the  living  world,  and  to  follow  the  concrete  man- 


114 


WAGES   AND    CAPITAL. 


ner  in  which  income  reaches  the  hands  of  those  who  are 
to  enjoy  it.  The  first  actual  step  in  the  process  by  which 
the  distribution  of  income  takes  place  in  the  modern  world 
is  the  payment  of  money  sums  by  the  business  man  to 
laborers  and  investors,  and  the  retention  in  his  own  hands 
of  the  residual  share. 

Consider  now  the  case  as  to  real  income.  This  reaches 
the  member  of  an  advanced  society  only  by  the  expendi- 
ture of  money  income.  Is  there  any  ground  for  treating 
the  real  income  of  the  community  and  of  its  various 
members  in  a  different  manner  from  their  money  in- 
come ? 

In  the  stage  that  immediately  follows  the  distribution 
of  money  income,  it  would  seem  that  no  ground  for  a  dif- 
ferent statement  of  the  case  can  be  found.  The  finished 
and  enjoyable  commodities  which  are  coming  to  market 
in  a  continuous  stream  constitute  the  real  income  which 
brings  substantial  satisfaction.  The  total  volume  of  the 
stream  is  settled  by  the  efficiency  of  a  succession  of  pro- 
ductive efforts  made  in  the  past.  The  quality  and  quan- 
tity of  the  individual  constituents  have  been  adapted  to 
satisfy  the  expected  tastes  and  means  of  consumers.  The 
money  income  which  reaches  various  hands  goes  to  the 
purchase  of  the  inflowing  commodities.  Produced  though 
these  must  have  been  with  regard  to  the  probable  demand 
of  purchasers,  no  precise  determination  of  shares  to  one 
or  another  kind  of  income  can  appear;  least  of  all  can 
any  part  be  said  to  be  residual.  None  of  the  real  income 
is  settled  in  advance  to  be  wages,  or  interest,  or  rent,  or 
employers'  profits.  There  is  no  residual  share  at  all : 
there  is  a  miscellaneous  assortment  of  commodities  which 
go  to  one  person  or  another,  according  to  the  money 
means  and  the  money  expenditure  of  each  one.  In  fact, 
the  conception  of  a  residual  share  would  seem  to  be  ap- 
plicable only  to  the  case  of  money  income.  There  is 


SOME    CONCLUSIONS.  115 

nothing  corresponding  to  it  in  the  machinery  by  which 
real  enjoyable  income  is  secured. 

There  is  still  another  sense  in  which  a  residual  share 
may  be  spoken  of.  It  might  be  maintained  that  one  or 
another  set  of  persons  secure  the  main  benefit  of  advances 
in  the  arts  ;  not  by  any  direct  or  quick-working  process,  but 
as  the  permanent  outcome  of  the  forces  which  eventually 
shape  distribution.  They  would  thus  be  in  a  position  to 
receive  what  is  left  after  other  classes  have  received  their 
settled  shares.  It  may  be  contended  that  the  laborers  have 
the  residual  place  in  this  sense  ;  the  incomes  going  to  capi- 
talists and  rent-receivers  being  so  determined  by  perma- 
nent forces  that  the  progress  of  industry  inures  mainly 
to  the  laborers'  benefit.  Or  it  may  be  asserted,  with  the 
socialists,  that  the  condition  of  the  laborers  tends  to  re- 
main unimproved  as  the  arts  advance,  and  that  the  well- 
to-do  classes, — investors,  business  men,  and  rent-receivers 
taken  together, — monopolize  the  material  gains  of  ad- 
vancing civilization. 

We  are  concerned  here  chiefly  with  the  relation  which 
these  divergent  views  as  to  the  permanent  outcome  of 
the  march  of  progress  bear  to  the  wages  fund  discussion  ; 
and  the  answer  is  simply  that  the  relation  is  nil.  The 
residual  position  of  laborers  or  of  others,  in  this  sense, 
has  nothing  to  do  with  that  direct  and  immediate  relation 
of  wages  to  capital  which  gave  rise  to  the  wages  fund 
doctrine.  Wages  may  be  paid  from  capital  or  from  prod- 
uct, may  come  from  a  rigid  or  an  elastic  fund  of  capital : 
whatever  the  answer,  it  will  throw  light  only  on  the 
machinery  by  which  their  remuneration  is  secured,  not  on 
the  nature  and  relative  strength  of  the  forces  which  move 
the  machinery.  If  we  would  know  whether  the  tendency 
in  an  advancing  society  is  for  the  receivers  of  wages  or 
interest  or  rent  to  become  the  chief  beneficiaries  of  im- 
provement, we  must  inquire  as  to  the  causes  which  in  the 


H6  WAGES   AND   CAPITAL. 

long  run  determine  the  one  or  other  sort  of  income.  As 
to  interest,  for  example,  the  inquiry  must  be  mainly  as  to 
the  promptness  with  which  accumulation  responds  to  a 
higher  or  lower  rate  of  return.  If  capital  is  saved  and 
invested  rapidly  when  a  certain  rate  of  return  is  exceeded, 
and  if  its  accumulation  is  promptly  checked  when  that 
rate  is  not  yielded,  we  may  say  that  interest  is  fixed  by  a 
constant  force  at  one  point,  and  that  the  share  of  income 
going  to  the  owners  of  capital  is  determined  by  a  simple 
multiplication  of  the  principal  by  the  rate.  Again,  as  to 
the  earnings  of  managing  business  men  (if  these  are  to 
be  regarded  as  a  distinct  class,  as  doubtless  for  many  pur- 
poses they  must  be),  we  should  need  to  consider,  first,  how 
great  a  degree  of  regularity  and  conformity  to  law  exists 
in  this  special  form  of  income  ;  next,  how  far  the  qualities 
which  mainly  enable  it  to  be  earned  are  the  result  of  edu- 
cation and  training,  how  far  of  the  traditions  and  the 
environment  of  the  well-to-do  classes,  how  far  of  varying 
degrees  of  inborn  and  unchangeable  ability.  On  such 
lines  we  might  reach  a  conclusion  as  to  the  extent  to 
which  this  sort  of  return  is  likely  to  be  kept  at  a  fixed 
point.  The  examples  need  not  be  pushed  further.  What 
has  been  said  suffices  to  indicate  how  the  permanent 
causes  which  determine  the  distribution  of  income  must 
be  followed  if  we  would  know  whether  one  class  or 
another  gets  greater  or  less  gain  from  the  general  prog- 
ress of  society.  The  cool  and  unbiased  observer  would 
probably  find  it  equally  difficult  to  accept  either  the 
optimistic  view  which  makes  the  laborer,  if  only  he  be 
intelligent  and  alert,  the  chief  beneficiary  of  the  advance, 
or  the  pessimistic  view  which  represents  him  as  hopelessly 
excluded,  under  the  regime  of  private  property,  from  any 
real  improvement  in  his  lot.  However  this  might  be,  he 
would  find  no  ground  for  one  conclusion  or  the  other  from 
the  analysis  of  capital  and  wages,  or  from  the  position  of 


SOME   CONCLUSIONS.  117 

hired  laborers  and  other  laborers  with  relation  to  past 
product  and  inchoate  wealth.  The  wages  fund  discussion, 
stripped  of  non-essentials,  throws  light  simply  on  the  pro- 
cess by  which,  in  any  advanced  organization  of  the  pro- 
ductive arts,  the  yield  of  an  intricate  succession  of  efforts 
finally  reaches  the  consumer  and  becomes  real  income. 
What  in  the  end  determines  real  income  and  its  apportion- 
ment to  one  class  in  society  or  another,  is  a  very  different 
question,  or,  rather,  a  mass  of  different  questions,  much 
less  easy  to  answer,  and  at  all  events  involving  other  and 
wider  premises. 

Nevertheless,  by  way  of  illustrating  still  further  the  re- 
lation between  the  permanent  forces  of  distribution  and 
the  channels  through  which  they  work  out  their  effects, 
we  may  follow  in  rapid  review,  on  the  lines  of  the  reason- 
ing presented  in  the  last  chapter,  the  mode  in  which  a 
change  in  the  permanent  forces  may  bring  about,  proxi- 
mately  or  remotely,  a  rise  in  general  wages. 

Money  income,  which,  as  the  key  to  real  income,  must 
be  followed  in  any  such  review,  goes  directly  and  in  the 
first  instance  to  the  independent  producers,  and  among 
these,  in  more  or  less  complete  preponderance  in  different 
communities,  to  the  capitalist  employers.  Through  thei: 
hands  it  passes  to  the  others,  hired  workmen  and  investors, 
whose  incomes  have  been  classed  as  dependent.  The 
most  effective  way  in  which  any  considerable  and  perma- 
nent change  to  the  advantage  of  laborers  can  come  about 
is  by  causes  which  increase  this  proximate  source  of  their 
income  ;  either  through  directly  larger  receipts  accruing 
in  the  hands  of  active  capitalists,  or  through  the  less 
direct  process  of  larger  money  sums  being  turned  over  to 
the  capitalists  by  investors.  It  may  be  admitted  that, 
even  in  the  absence  of  conditions  swelling  these  sums,  a 
general  rise  in  wages  is  not  impossible.  The  money 
means  which  employers  can  advance  to  laborers  are  not 


H8  WAGES   AND   CAPITAL. 

fixed  or  predetermined ;  the  residual  share  which  they  are 
to  retain  is  probably  not  at  the  absolute  minimum,  and 
certainly  is  not  fixed  by  any  rigid  law;  and  well-directed 
pressure  on  them  may  squeeze  out  something  which  the 
laborers  would  not  otherwise  get.  But  it  is  still  true  that 
the  money  funds  which  the  active  employers  can  turn 
over  to  laborers  are  at  any  given  time  subject  to  a  limit 
which,  even  though  it  be  elastic,  is  not  distant ;  and  that  a 
considerable  and  permanent  gain  in  general  money  wages 
can  come  only  when  larger  money  means  flow  into  the 
hands  of  the  employing  class. 

This  holds  good,  whatever  the  causes  of  the  larger 
money  means:  even  though  it  be  only  a  greater  plentiful- 
ness  of  money  or  of  its  substitutes.  A  general  advance  in 
prices,  due  to  monetary  causes,  inures  first  to  those  who 
have  products  to  sell.  It  reaches  those  who  are  in  re- 
ceipt of  dependent  incomes  only  by  a  secondary  process, 
which  usually  works  out  its  results  after  a  longer  or 
shorter  interval.  No  phenomenon  is  more  familiar  in  mon- 
etary history  than  the  slow  advance  of  money  wages,  as 
compared  with  the  prices  of  goods,  when  a  sudden  increase 
of  inconvertible  money  causes  a  depreciation  of  the  cir- 
culating medium.  This  is  not  a  necessity  of  the  case;  but 
it  is  a  result  which,  obviously,  is  very  likely  to  ensue  from 
the  position  of  the  active  manager  of  industry  at  the 
primary  source  of  money  income.  When  a  general  ad- 
vance in  total  money  income  takes  place  by  some  more 
gradual  process,  it  goes  again  first  to  the  managing  pro- 
ducers, and  through  their  hands  is  again  transferred,  more 
or  less  slowly,  to  those  whose  incomes  are  derivatory. 

An  increase  in  the  total  money  revenue  of  the  com- 
munity may  bring  also  a  substantial  gain  in  its  real  rev- 
enue of  consumable  goods.  Thus  a  more  ample  produc- 
tion of  goods  may  sell  for  a  larger  total,  even  though 
prices  are  declining;  the  increase  in  quantity  more  than 


SOME   CONCLUSIONS.  H9 

offsetting  the  decline  in  prices.  Such  has  been  the  course 
of  events  during  the  last  generation  in  almost  all  civilized 
countries.  The  larger  gross  money  incomes  of  the  active 
managers  of  industry,  brought  about  in  this  way,  have  been 
the  source  of  that  unmistakable  rise  in  money  wages,  as 
well  as  in  other  sorts  of  income,  which  has  taken  place 
concurrently  with  the  fall  in  prices.  Whether  the  position 
of  the  active  capitalists  at  the  starting  point  of  the  gain 
has  enabled  them  to  reap  advantages  similar  to  those 
which  they  almost  invariably  get  from  a  sudden  rise  in 
prices,  is  not  easily  to  be  ascertained.  The  probabilities 
are  that  some  substantial  pickings  have  not  failed,  for  a 
time  at  least,  to  remain  in  their  hands.  The  optimist  may 
assert,  not  without  a  good  show  of  reason,  that  such  gains 
are  the  justified  reward  of  the  initiative  taken  by  the  busi- 
ness man  in  those  multiform  improvements  of  the  arts 
whose  accumulated  effect  has  been  the  general  increase 
of  well-being;  while  the  philosophic  observer  may  accept 
them  as  the  outcome,  inevitable  even  though  not  always 
agreeable,  of  the  regime  of  private  property,  taking  their 
place  among  the  mixed  results  whose  balance  on  the  whole 
serves  to  justify  the  existing  order  of  things.  However 
this  may  be,  the  fact  of  the  case  is  that  the  increase  of  the 
money  receipts  of  the  active  managers  of  industry  has 
been  the  proximate  source  and  the  main  cause  of  the  gain 
in  secondary  money  incomes.  The  general  and  continued 
advance  in  money  wages  could  not  have  taken  place  if 
the  money  inflow  to  the  capitalist  employers  had  not  also 
enlarged. 

No  doubt,  side  by  side  with  the  general  progress  of 
the  arts  which  has  increased  the  total  income  of  the  com- 
munity, other  causes  may  have  been  at  work  to  divert  a 
larger  part  of  that  income  to  the  laborers:  causes  which 
might  have  led  to  a  result  similar  in  kind,  though  less 
marked  in  degree,  even  if  there  had  been  no  general  prog- 


I2o  WAGES   AND   CAPITAL. 

ress.  The  interest  which  from  time  to  time  has  been  paid 
to  investors  may  have  been  such  as  to  move  these  latter 
to  save  more,  and  put  more  money  means  into  the  hands 
of  the  active  business  class.  The  residual  income  which 
has  been  retained  by  that  class,  again,  may  have  been  so 
great  and  so  tempting  as  to  induce  them  directly  or  indi- 
rectly to  enlarge  their  ventures.  From  either  source  would 
come  larger  money  means  for  industrial  operations,  and 
so  the  proximate  causes  of  a  rise  in  money  wages  :  always 
supposing  the  number  of  hired  laborers  remains  the  same, 
or  does  not  increase  as  much  as  the  funds  directed  to 
their  hire.  How  far  the  advance  in  money  wages  has  in 
fact  been  due  simply  to  the  general  advance  in  produc- 
tion and  in  the  community's  total  income ;  how  far  an 
increasing  disposition  to  accumulate  and  invest  among 
capitalists,  active  and  idle,  has  had  its  share ;  how  far 
trades  unions  have  been  efficacious  in  securing  for  labor- 
ers a  quicker  and  greater  advance  than  unorganized  work- 
men could  have  got, — these  must  be  matters  largely  of 
conjecture.  The  facts  of  the  situation,  so  far  as  they  can 
be  made  out,  would  seem  to  warrant  no  large  generaliza- 
tions as  to  the  absorption  of  the  whole  gain  by  one  class 
in  .society  or  another,  and  so  confirm  neither  an  optimis- 
tic nor  a  pessimistic  view  as  to  any  residual  shares.  All 
hands  have  gained,  and  the  proximate  cause  of  the  gain 
for  all  has  been  in  the  general  and  continued  increase  of 
the  gross  revenues  which  flow  first  into  the  hands  of  capi- 
talist employers. 

Continuing  such  an  investigation  as  to  the  mode  in 
which  the  condition  of  hired  laborers  may  advance  and 
has  advanced,  we  should  have  to  consider  real  wages:  the 
flow  of  consumable  goods  to  whose  purchase  money  in- 
come is  devoted.  That  flow,  so  far  as  the  production  of 
one  or  another  sort  of  commodity  is  concerned,  follows 
the  apportionment  of  money  income;  not  indeed  with 


SOME   CONCLUSIONS.  121 

mechanical  exactness,  but,  given  time,  with  sufficiently 
accurate  response.  The  traders  buy,  and  the  more  distant 
producers  turn  out,  such  finished  goods  as  are  demanded 
by  the  purchasing  consumers.  For  any  one  season  the 
quantity  and  quality  of  consumable  goods  that  may  go  to 
real  wages  are  largely  predetermined;  but  with  the  lapse 
of  time,  with  the  continual  consumption  of  commodities 
now  on  hand,  and  the  continual  production  of  new  com- 
modities, we  find  the  flow  of  real  income  responding  to  the 
apportionment  of  money  income.  The  volume  of  real 
wages  will  then  depend  partly  on  the  proportion  of  the 
productive  efforts  of  the  community  which  the  laborer's 
share  in  money  income  will  direct  to  the  satisfaction  of 
their  wants,  and  partly  on  the  efficiency  of  the  productive 
efforts  so  directed.  If  one  half  of  the  revenue  of  society 
gets  into  the  hands  of  laborers,  probably  one  half  of  the 
work  of  society  will  be  directed  to  making  commodities 
for  laborers'  use.*  How  much  of  such  commodities  they 
will  get  will  then  depend  further  on  the  extent  to  which 
the  arts  make  this  part  of  society's  work  effective.  If 
inventions  and  improvements  happen  to  be  applied  with 
great  effect  to  the  commodities  bought  and  consumed 
by  laborers,  their  substantial  real  wages  will  be  so  much 
greater.  The  further  possible  developments  of  the  situ- 
ation, in  case  of  a  rise  in  money  wages  which  brings 
also  a  rise  of  real  wages,  will  readily  suggest  them- 
selves. Population  may  or  may  not  increase  in  such 
mode  as  eventually  to  neutralize  the  advance.  The  real 

*  Probably,  but  not  necessarily.  This  would  depend  on  the  rate  of  pay 
earned  by  those  who  produced  the  commodities  consumed  by  the  labor- 
ers, as  compared  with  the  pay  of  those  who  produced  the  real  income  of 
other  classes.  Assuming  all  workers  to  be  equally  paid,  or  the  different 
strata  to  be  called  on  in  the  same  proportion  in  the  making  of  every 
sort  of  real  income,  the  probability  mentioned  in  the  text  becomes  a 
certainty. 


I22  WAGES   AND   CAPITAL. 

happiness  finally  yielded  to  the  laborers  may  or  may  not 
grow :  the  ethical  philosopher  and  the  psychologist,  as 
well  as  the  speculative  economist,  would  have  something 
to  say  at  this  point.  No  subject  among  the  humanities 
involves  a  wider  or  more  difficult  set  of  questions:  none 
needs  to  be  approached  with  greater  diffidence  and  caution. 
The  complication  of  causes  and  conditions  which  need 
to  be  considered  for  a  full  understanding  of  all  that  bears 
on  the  welfare  of  laborers,  or  indeed  of  any  class  in  soci- 
ety, is  thus  almost  infinite.  To  follow  these  causes  and 
conditions  would  be  to  write  a  book  not  only  on  distribu- 
tion, but  on  social  philosophy  at  large.  The  present  vol- 
ume has  a  much  more  modest  task,  and  this  digression 
into  the  larger  field  has  been  meant  chiefly  to  show,  by  com- 
parison, the  limitations  of  the  subject  now  in  hand.  The 
fundamental  questions  as  to  wages  and  distribution  ;  as  to 
what  makes  wages  high  or  low ;  as  to  the  ultimate  effects 
of  the  march  of  progress  in  bringing  special  benefit  to  one 
or  another  class  in  the  community, — these  can  not  be  settled 
by  any  inquiry  as  to  the  wages  fund  or  as  to  the  proxi- 
mate source  of  wages.  Some  aid  in  answering  them  must 
indeed  be  got  by  following  the  course  of  concrete  industry. 
It  is  indispensable  to  any  inquiry  which  shall  bring  solid 
results  that  not  only  the  fundamental  forces  at  work  shall 
be  discovered,  but  that  the  precise  mode  in  which  they 
work  out  their  effects  shall  be  traced  step  by  step.  It  is 
here,  and  here  only,  that  the  analysis  of  the  relation  of 
wages  to  capital,  as  set  forth  in  the  preceding  pages,  may 
help  us:  pointing  out  the  mode  in  which  production  and 
distribution  take  place  in  modern  societies,  and  the  ma- 
chinery through  which  the  abiding  moral  and  material 
forces  work  out  their  effects. 

This,  then,  is  the  conclusion  of  our  inquiry.     The  old 
doctrine  of  the  wages  fund  had  a  solid  basis  in  its  con- 


SOME    CONCLUSIONS. 


I23 


ception,  incomplete  yet  in  essentials  just,  of  the  payment 
of  present  labor  from  past  product.  The  new  theories 
which  disregard  this  fundamental  fact,  and  seek  to  explain 
distribution  by  considering  labor  as  paid  directly  from  its 
own  present  product,  begin  with  a  false  premise  and  distort 
the  facts  of  the  actual  world.  But  the  analysis  of  the  mode 
in  which  labor  yields  enjoyable  products,  of  the  grounds 
for  considering  the  capital  of  the  community  as  the  source 
of  real  wages,  of  the  relation  of  the  money  funds  of  em- 
ployers to  the  wages  of  hired  laborers, — all  this  is  to  take 
only  the  first  step  toward  an  understanding  of  the  situation. 
To  use  a  phrase  which  has  already  been  applied,  it  de- 
scribes the  machinery  of  production  and  distribution,  not 
the  forces  which  move  the  machinery  and  cause  its  parts 
to  shift  and  change.  The  wages  fund  theory — if  that 
name  can  be  given  to  the  form  in  which  it  has  here  been 
set  forth — shows  the  steps  by  which  wages  get  into  the 
laborer's  hands,  and  so  points  to  the  nearest  and  most 
obvious  causes  which  affect  them.  It  shows  what  is  the 
process  by  which  goods  are  produced  in  the  great  and 
complicated  organism  of  modern  society,  and  what  are  the 
channels  by  which  the  enjoyable  commodities  reach  the 
hands  of  its  various  members.  To  understand  that  pro- 
cess, to  follow  those  channels,  is  indispensable  to  truth 
and  accuracy  of  knowledge.  But  it  does  not  tell  the 
whole  story. 


PART  II. 

THE   HISTORY   OF  THE   WAGES   FUND 
DOCTRINE. 

CHAPTER   VI. 

BEFORE    ADAM    SMITH. 

WE  enter  now  on  the  second  part  of  the  investigation : 
the  history  of  the  wages  fund  doctrine,  and  of  the  mode 
in  which  the  relation  of  wages  to  capital  has  been  treated 
by  writers  of  the  past  and  present. 

The  history  of  some  parts  of  economic  thought  goes 
far  back  into  the  past.  But  theoretic  inquiry  as  to  the 
causes  which  affect  distribution  under  the  conditions  of 
modern  industry  is  of  very  recent  date.  It  does  not  reach 
back  farther  than  the  second  half  of  the  eighteenth  cen- 
tury, and  virtually  begins  with  Adam  Smith.  With  a 
single  exception,  presently  to  be  mentioned,  we  find  in 
the  writers  before  Adam  Smith  hardly  a  trace  of  the  sort 
of  reasoning  which  has  been  applied  during  the  last  hun- 
dred years  to  wages  and  the  return  to  capital,  and  to 
most  of  the  modern  phenomena  of  distribution. 

No  branch  of  knowledge,  it  is  true,  is  without  its  link 
of  connection  with  the  past.  Adam  Smith  was  not  an 
isolated  growth.  He  began  where  his  predecessors  left 
off,  and  rested  his  new  work  solidly  on  what  they  had 
already  accomplished.  lint  in  his  case,  as  often  happens, 
the  fresh  growth  was  in  a  different  direction  from  the  old, 
and  in  some  respects  was  of  an  entirely  novel  sort.  Of 

124 


BEFORE   ADAM   SMITH. 


125 


the  points  of  connection  between  the  great  Scotchman  and 
his  predecessors  something  more  will  be  said  in  the  next 
chapter.  So  far  as  the  subject  of  this  inquiry  is  con- 
cerned, the  connection  between  earlier  and  later  thought 
happens  to  be  singularly  slight.  The  earlier  writers  had 
virtually  done  no  more  than  to  clear  some  parts  of  the 
field,  and  so  make  it  easier  for  an  acute  and  original 
thinker  to  take  a  fresh  start. 

On  the  direct  subject  of  wages,  then,  and  on  capital 
in  its  relation  to  wages,  we  find  practically  nothing  in  the 
earlier  writers.  Scattered  through  the  literature  of  the 
seventeenth  and  eighteenth  centuries  there  are  casual 
allusions  to  wages,  usually  implying  that  they  are  deter- 
mined by  the  price  of  food.  Subjects  connected  with 
money  and  international  trade  mainly  occupied  the  atten- 
tion of  the  writers  of  those  times.  On  the  problems  of 
distribution  they  gave  no  more  than  incidental  expres- 
sion to  opinions  half-consciously  formed.  Probably  as 
explicit  a  statement  as  can  be  found  on  the  subject  of 
wages  is  that  of  Mildmay.  "  As  plenty  and  scarcity  will  in 
general  determine  the  price  of  provisions,  so  the  price  of 
provisions  will,  in  general,  determine  the  wages  of  labour, 
and  the  price  of  labour  will  determine  the  price  of  all  pro- 
ductions and  commodities  whatsoever."  *  Some  such  opin- 
ion as  this  seems  to  have  been  entertained  usually,  though 
not  universally,  by  the  writers  of  Mildmay's  period.  Petty 
had  indeed  intimated  a  different  view.  "When  corn  is 
extremely  plentiful,  the  Labour  of  the  poor  is  proportion- 
ally dear :  and  scarce  to  be  had  at  all  (so  licentious  are 
they  who  labour  only  to  eat,  or  rather  to  drink)."  f  But  as 
great  a  mind  as  Locke's  had  accepted  opinions  like  those 


*  Sir  William  Mildmay,   The  Laws  and  Policy  of  England  relating  to 
Trade,  London,  1765,  p.  22. 

f  Petty,  Political  Arithmetic,  London,  1691,  p.  45. 


126  WAGES   AND   CAPITAL. 

of  Mildmay,*  and  most  of  the  mercantile  writers  did  the 
same.  They  stated,  or  implied,  that  a  low  price  of  food 
made  low  wages, — a  result  desirable  in  that  it  brought  low 
prices  and  ready  exports.  Such  remarks,  however,  as  a 
rule,  were  simply  incidental  to  the  discussion  of  money 
and  the  balance  of  trade.  It  is  significant  that  writers 
like  Child,  Gee,  and  Steuart  have  not  a  word  on  the  gen- 
eral causes  that  affect  wages,  or  on  capital  as  connected 
with  wages.  To  all  intents,  the  discussion  of  this  phase 
of  economics  had  not  begun. 

This  blank  among  the  earlier  writers  on  the  topic 
which  in  our  own  time  has  become  the  crucial  one  in 
economic  theory,  is  to  be  explained  in  two  ways.  In  part, 
it  was  due  to  their  narrow  point  of  view.  They  were  con- 
cerned chiefly  with  the  power  of  the  sovereign,  and  the 
greatness  and  resources  of  the  country  in  its  dealings 
with  foreign  nations.  As  wars  and  international  relations 
chiefly  engrossed  the  attention  of  statesmen  in  the  period 
from  the  Reformation  to  the  French  Revolution,  so  the 
nature  and  profit  of  dealings  with  foreign  countries  chiefly 
interested  those  who  thought  on  economic  subjects.  The 
statesman  of  the  nineteenth  century  is  occupied  with  con- 
stitutional and  social  questions;  the  economist,  similarly, 
with  the  problems  of  distribution. 

Another  cause  of  the  silence  of  the  earlier  writers  lies 
in  the  economic  conditions  of  their  time.  The  feudal 
regime  and  the  industrial  organization  of  the  middle  ages 
were  gone.  The  modern  conditions,  while  fast  develop- 
ing, had  not  yet  emerged  with  distinctness.  The  phe- 
nomena which  arose  as  employers  and  capitalists  were 
unfettered  and  as  labor  became  free,  had  not  existed 
long  enough  to  compel  specific  examination.  Conse- 

*  Locke,  Some  Considerations  of  tlie  Consequences  of  t/te  Lowering  of 
Interest,  1691,  in  his  works,  vol.  v,  pp.  23,  24. 


BEFORE   ADAM    SMITH. 


127 


quently  even  those  writers  whose  point  of  view  was  wider 
and  more  humane  than  that  of  the  typical  mercantilists, 
did  not  strike  the  modern  note.  Vauban  and  Boisguille- 
bert  take  the  social  point  of  view;  they  consider  the 
causes  of  the  condition  of  the  masses;  but  of  wages  in  the 
modern  sense  they  have  nothing  to  say.  Even  the  Physi- 
ocrats, important  as  is  the  place  which  they  take  in  the 
development  of  modern  economic  thought,  yield  nothing 
on  this  topic.  Quesnay  rarely  touches  on  wages,  never  on 
the  nature  and  functions  of  capital  or  on  the  relations 
between  capital  and  wages.  English  writers,  like  Hume, 
Cantillon,  and  Tucker,  joined  the  Physiocrats  in  attacking 
the  mercantile  ideas  on  money  and  international  trade, 
and  in  directing  attention  to  abundance  of  commodities 
and  productiveness  of  labor  as  the  true  sources  of  pros- 
perity. But  the  problems  of  social  happiness,  as  connect- 
ed with  internal  prosperity,  which  lead  to  a  discussion  of 
wages,  did  not  attract  their  notice. 

To  this  general  silence  on  the  subject  of  our  inquiry 
before  the  time  of  Adam  Smith,  there  is  one  noteworthy 
exception.  Turgot,  great  in  everything  that  he  touched, 
made  his  mark  here  also.  In  the  Reflexions  sur  la  For- 
mation et  Distribution  des  Ric/iesses,  published  in  1767,  we 
have  a  theory  of  capital  which  may  justly  be  called  the 
first  modern  discussion  of  the  subject.*  It  is  true  that 
Turgot's  discussion  begins  from  the  old  point  of  view.  He 
is  led  to  a  consideration  of  capital  from  his  discussion  of 
money;  the  whole  treatment  of  capital  is  an  episode  in 
his  examination  of  money,  interest,  and  the  "disposable" 
class.  But  the  treatment  is  a  long  step  beyond  anything 
reached  before  his  time.  The  function  of  capital  is  to 
make  the  advances  which  become  necessary  when  a  great 


*  See  the  Works  of  Turgot  (edition  of  1844),  vol.  i,  sections  60-61,  69, 
80,  90,  of  the  deflexions. 

10 


128  WAGES   AND   CAPITAL. 

number  of  arts  "exigent  que  la  meme  matiere  soit  ouvre'e 
par  une  foule  de  mains  differentes,  et  subisse  tres  long- 
temps  de  preparations  aussi  difficiles  que  variees."  The 
hall-mark  of  the  Physiocrats  appears  in  the  curious  doctrine 
that  in  agriculture  there  was,  strictly  speaking,  no  need  of 
an  advance;  since  land  always  produced  a  "revenu"or 
"superflu,"  which  enabled  its  cultivators  to  dispense  with 
advances.  According  to  Turgot,  it  is  only  when  a  large 
part  of  society  no  longer  cultivated  the  soil  and"n'eut 
que  ses  bras  pour  vivre,"  that  advances  became  necessary. 
Materials,  implements,  buildings,  and  subsistence  must  be 
provided, — say  for  making  leather;  "  et  qui  fera  vivre 
jusqu'a  la  vente  des  cuirs  ce  grande  nombre  d'ouvriers"? 
The  constant  advance  or  consumption  of  capital,  its  con- 
stant reproduction  and  return  to  the  hands  of  the  capital- 
ist, the  source  of  capital  in  "  1'epargne,"  the  distinction 
between  money  and  capital,  the  absence  of  connection  be- 
tween the  rate  of  interest  and  the  quantity  of  money,  the 
futility  of  attempts  to  regulate  the  rate  of  interest, — these 
varied  subjects  are  presented  with  an  insight  far  beyond 
that  of  any  writer  before  the  time  of  Turgot,  and  not  less 
than  that  of  many  writers  who  have  had  the  benefit  of  a 
century  of  further  discussion.* 

But  while  Turgot  thus  took  an  important  step  toward 
beginning  the  modern  analysis  of  capital,  he  is  silent  on 
that  aspect  of  the  subject  which  has  most  prominence  in 
the  later  discussions  of  distribution, — on  the  relations  of 
capital  to  wages.  It  is  true  that  he  says  more  than  once 
that  capital  provides  subsistence  for  laborers,  as  well  as 
materials,  implements,  and  buildings.  Some  expressions 
which  show  that  this  function  of  capital  was  clearly  in  his 
mind  have  just  been  quoted.  But  that  there  might  be 


*  See  the  Works  of  Turgot  (edition  of  1844),  vol.  i,  sections  60-61,  69, 
So,  90,  Kfyh'xions, 


BEFORE   ADAM    SMITH. 


I29 


here  a  mode  of  approaching  the  problem  as  to  what  de- 
termined the  wages  of  laborers,  never  seems  to  have  oc- 
curred to  him.  Turgot's  theory  of  wages  is  very  briefly 
stated  in  the  first  pages  of  the  Reflexions  ;  it  is  the  same 
as  was  held,  so  far  as  any  was  held,  by  all  writers  of  this 
earlier  period.  "  En  tout  genre  de  travail  il  doit  arriver 
et  il  arrive  en  effet  que  le  salaire  de  1'ouvrier  se  borne  a 
ce  que  lui  est  necessaire  pour  lui  procurer  sa  subsistence." 
There  is  no  hint  of  any  Malthusian  ground  for  the  doc- 
trine. It  rests  on  the  fact  that  the  employer  pays  the 
laborer  as  little  as  he  can,  and  has  "  choix  entre  grand 
nombre  d'ouvriers."  *  Thus  it  serves  chiefly  to  clear  the 
way  for  the  discussion  of  net  income,  of  the  disposable 
class,  and  of  the  physiocratic  conclusions  as  to  taxation 
and  economic  reform.  In  all  this  the  laborers  are  not 
thought  to  need  much  attention.  They  get  only  what 
serves  to  subsist  them,  and  have  no  share  in  net  revenue. 
In  short,  they  are  simply  eliminated  from  the  problem. 

Directly,  therefore,  Turgot  left  the  subject  of  wages 
and  capital  almost  untouched,  and  so  left  a  clear  field  for 
Adam  Smith.  Doubtless  it  would  be  possible  to  find 
scattered  hints  and  pregnant  sentences  in  other  writers : 
embryos  which  never  developed,  and  never  would  attract 
notice,  had  not  the  full-grown  thought  appeared  elsewhere 
from  another  beginning.  Doubtless,  too,  the  general  spec- 
ulations of  the  Physiocrats  and  of  their  contemporaries 
on  distribution  at  large  had  their  share  in  directing 
thought  into  new  and  better  ways,  and  stimulated  inquiry 
into  deeper  and  more  substantial  causes  of  prosperity 
than  had  been  commonly  examined  by  earlier  writers. 
But,  when  all  is  said,  it  remains  substantially  true,  as  one 
of  the  great  Scotchman's  immediate  followers  said,  that 

*  See    the    Works   of  Turgot    (edition    of   1844),    vol.    i,    section   6, 
J\/Jlexion. 


130 


WAGES   AND   CAPITAL. 


"the  theory  of  capital  is  new,  and  entirely  of  Adam 
Smith's  creation  ":*  and  to  the  examination  of  his  views 
we  may  now  proceed. 

*  Ganilh,  Inquiry  into  the  Various  Systems  of  Political  Economy.  I 
quote  from  the  New  York  edition  of  1812,  page  162.  Compare  what  is 
said  of  Ganilh  below,  at  page  157. 


CHAPTER  VII. 

ADAM    SMITH. 

DURING  the  first  half  of  the  present  century,  when 
Adam  Smith's  prestige  was  greatest,  it  was  the  custom  to 
treat  all  earlier  contributions  to  economic  thought  as  of 
little  account,  and  to  begin  the  history  of  the  subject  with 
the  Wealth  of  Nations.  In  the  reaction  of  the  second  half 
of  the  century  there  has  been  a  disposition  to  credit  too 
much  to  Adam  Smith's  predecessors,  and  to  belittle  his 
own  contributions.  Before  proceeding  to  the  details  of 
his  discussion  of  capital  and  wages,  we  may  consider  for 
a  moment  his  general  position  in  the  growth  of  economic 
theory  :  thereby  supplementing  what  has  just  been  said  of 
the  stage  of  earlier  speculation  as  to  wages. 

On  some  subjects,  and  notably  on  those  which  most 
attracted  the  attention  of  his  contemporaries,  Adam 
Smith  gained  much  and  directly  from  his  predecessors. 
The  mercantile  ideas,  in  their  cruder  forms,  had  been 
refuted  by  a  long  series  of  writers,  by  North  and  Hume 
among  the  English,  by  Boisguillebert,  Cantillon,  and  the 
whole  line  of  the  Physiocrats.  The  functions  of  money 
in  domestic  and  in  international  trade  had  been  fully  and 
adequately  discussed  by  these  writers;  and  much  had  also 
been  done  toward  clearing  up  the  subject  of  money  by 
writers  who,  like  Locke  and  Steuart,  were  still  befogged 
on  international  commerce  and  the  balance  of  trade.  On 
credit,  paper  money,  and  banking  there  had  been  active 

131 


132 


WAGES   AND   CAPITAL. 


discussion  since  the  close  of  the  seventeenth  century, 
when  banks  began  to  exercise  their  functions  on  a  con- 
siderable scale,  and  paper-money  experiments  came  to  be 
tried  in  almost  every  form.  Adam  Smith  was  abundantly 
familiar  with  the  literature  of  his  subject,  and  accepted 
without  hesitation  what  had  been  accomplished  by  his 
predecessors.  The  famous  attack  on  the  mercantile  sys- 
tem bears,  indeed,  the  unmistakable  marks  of  his  vigorous 
and  independent  mind,  in  the  reasoning  as  to  the  limitation 
of  industry  by  capital,  and  in  the  general  discussion  of 
foreign  trade.  But  the  ground  had  been  prepared  for  it 
by  a  long  line  of  writers;  and  the  upper  tier  of  the  edu- 
cated public  was  prepared  to  accept  his  views  at  once. 

The  subjects  of  production  and  distribution  show 
Adam  Smith,  not  perhaps  at  his  best,  but  at  his  freshest. 
Here  he  broke  new  ground.  On  the  division  of  labor  and 
its  causes  and  effects,  the  functions  of  capital,  the  parti- 
tion of  income  into  wages,  profits,  and  rent,  the  causes 
determining  the  amount  of  each  form  of  remuneration, — 
on  all  these  topics  he  started  economic  thought  on  new 
lines,  and  on  lines  that  have  been  substantially  followed 
since  his  time.  The  very  novelty  of  his  investigation  made 
it  inevitable  that  his  results  here  should  be  more  crude 
than  on  the  subjects  which  had  been  worked  over  by  two 
or  three  generations  of  previous  thinkers;  a  defect  which, 
rightly  considered,  makes  the  debt  of  science  to  him  so 
much  the  greater. 

Even  on  these  subjects,  it  would  be  a  mistake  to  con- 
sider Adam  Smith  as  an  unaided  pioneer.  The  division 
of  labor,  and  its  consequences  in  bringing  exchange  and 
necessitating  a  medium  of  exchange,  had  been  noted  by 
a  long  series  of  writers,  from  ancient  times  to  modern. 
Further,  some  stimulus  to  his  thought  on  capital  doubt- 
less came  from  the  general  reaction  against  the  treatment 
of  interest  and  money  by  the  mercantile  writers.  The 


ADAM    SMITH.  ^3 

older  and  cruder  notions  as  to  the  importance  of  an 
abundance  of  specie  had  been  effectually  exploded  before 
he  began.  As  these  exaggerations  in  regard  to  the  im- 
portance of  plentiful  specie  crumbled  away,  it  was  inevi- 
table that  other  ideas  connected  with  them  should  be 
overhauled  and  reshaped.  The  function  of  money  having 
become  clear,  interest  could  no  longer  be  explained  as 
affected  simply  by  the  abundance  or  scarcity  of  money. 
The  better  understanding  of  the  medium  of  exchange, 
again,  directed  attention  to  the  nature  and  qualities  of 
the  commodities  whose  barter  was  seen  to  be  facilitated. 
All  this  paved  the  way  to  the  consideration  of  real  capital, 
and  the  real  machinery  of  production.  In  such  indirect 
ways  Adam  Smith  probably  got  a  stimulus  to  his  specula- 
tions on  capital  and  interest,  and  so,  by  a  natural  progres- 
sion, on  capital  and  wages. 

The  Physiocrats,  moreover,  had  attacked  the  real 
problems  of  production  and  distribution.  The  place  of 
land  in  production  had  been  emphasized  by  them.  The 
derivation  of  all  net  income  from  land,  and  the  reasoning 
which  led  to  the  denial  of  net  income  in  other  directions, 
began  the  treatment  of  distribution  on  the  lines  of  modern 
theory.  The  very  emphasis  on  these  deeper  subjects,  as 
compared  with  the  almost  exclusive  attention  of  their 
predecessors  to  the  more  superficial  phenomena  of  money, 
was  an  important  advance.  Turgot,  as  we  have  seen,  had 
described  the  importance  and  functions  of  capital  with 
great  insight  and  ability.  Adam  Smith  was  familiar  with 
the  writings  of  his  French  contemporaries  ;  he  used  them 
freely,  and  certainly  drew  much  from  them. 

But,  when  all  is  said,  the  essential  novelty  of  Adam 
Smith's  contributions  remains  unmistakable.  The  im- 
portance and  consequences  of  the  division  of  labor  he 
followed  into  regions  where  his  predecessors  had  left  a 
blank.  Any  one  who  compares  his  discussion  of  the  in- 


134 


WAGES   AND   CAPITAL. 


come  from  land  with  that  of- the  Physiocratic  writers  must 
see  that,  both  in  the  main  lines  and  in  the  details  with 
which  they  are  illustrated,  an  essentially  new  turn  had 
been  given  to  the  discussion.  On  capital  and  its  func- 
tions, his  treatment,  in  some  respects  no  more  profound 
than  Turgot's,  is  yet  fresher,  more  direct,  and  closer  to  the 
real  phenomena  which  it  is  the  object  of  the  economist 
to  explain.  Distribution  was  practically  created  by  him. 
The  simple  division  under  the  three  heads  of  wages,  profits, 
and  rent,  in  itself  marks  an  epoch.  Something  of  the  sort 
may  indeed  be  said  to  underlie  the  Physiocratic  separation 
of  the  three  classes, — the  productive,  the  barren,  the  dis- 
posable ;  but  the  most  cursory  comparison  shows  how 
much  closer  to  the  actual  phenomena  was  Adam  Smith's 
classification  of  income  and  income-receivers.  Under  each 
head,  again,  he  advanced  far  in  the  direction  which  sub- 
sequent thought  has  followed  to  our  own  time.  This  is 
especially  the  case  with  his  treatment  of  the  main  subject 
of  the  present  inquiry:  wages  and  capital,  and  the  rela- 
tions of  workmen  and  employers. 

The  point  of  departure  in  Adam  Smith's  reasoning  on 
production  and  distribution  is  the  division  of  labor.  The 
first  and  second  books  of  the  Wealth  of  Nations,  which  con- 
tain chapters  of  most  interest  and  importance  to  later 
generations,  open  with  this  topic.  The  emphasis  was  in- 
tentional, and  is  one  of  the  marks  of  Adam  Smith's  in- 
sight. He  rightly  thought  that  the  characteristic  phe- 
nomena of  advanced  societies  rest  on  the  division  of  labor, 
developed  under  the  conditions  of  free  industry.  And 
this  he  held  to  be  true  of  distribution  as  well  as  of  pro- 
duction. The  account  of  the  increase  in  the  productive- 
ness of  labor  from  its  division  is  one  of  the  best-known, 
as  it  is  one  of  the  most  interesting  passages  in  the 
book. 


ADAM    SMITH. 


135 


"  Observe  the  accommodation  of  the  most  common  artificer  or 
day  labourer  in  a  civilized  and  thriving  country,  and  you  will  per- 
ceive that  the  number  of  people  of  whose  industry  a  part,  though 
but  a  small  part,  has  been  employed  in  procuring  him  this  accom- 
modation, exceeds  all  computation.  The  woollen  coat,  for  exam- 
ple, which  covers  the  day  labourer,  as  coarse  and  rough  as  it  may 
appear,  is  the  produce  of  the  joint  labour  of  a  great  multitude  of 
workmen.  The  shepherd,  the  sorter  of  the  wool,  the  wool-comber 
or  carder,  the  dyer,  the  scribbler,  the  spinner,  the  weaver,  the  fuller, 
the  dresser,  with  many  others,  must  all  join  their  different  arts  in 
order  to  complete  even  this  homely  production.  How  many  mer- 
chants and  carriers,  be'sides,  must  have  been  employed  in  transport- 
ing the  materials  from  some  of  those  workmen  to  others  who  often 
live  in  a  very  distant  part  of  the  country !  How  much  commerce 
and  navigation  in  particular,  how  many  shipbuilders,  sailors,  sail- 
makers,  ropemakers,  must  have  been  employed  in  order  to  bring  to- 
gether the  different  drugs  made  use  of  by  the  dyer,  which  often 
come  from  the  remotest  parts  of  the  world  !  What  a  variety  of 
labour,  too,  is  necessary  in  order  to  produce  the  tools  of  the  mean- 
est of  those  workmen  !  To  say  nothing  of  such  complicated  ma- 
chines as  the  ships  of  the  sailor,  the  mill  of  the  fuller,  or  even  the 
loom  of  the  weaver,  let  us  consider  only  what  a  variety  of  labour  is 
requisite  in  order  to  form  that  very  simple  machine,  the  shears  with 
which  the  shepherd  clips  the  wool.  The  miner,  the  builder  of  the 
furnace  for  smelting  the  ore,  the  feller  of  the  timber,  the  burner  of 
the  charcoal  to  be  made  use  of  in  the  smelting  house,  the  brick- 
maker,  the  bricklayer,  the  workmen  who  attend  the  furnace,  the 
millwright,  the  forger,  the  smith,  must  all  of  them  join  their  differ- 
ent arts  in  order  to  produce  them."  * 

From  this  initial  description,  Adam  Smith  is  led  to  the 
discussion  of  the  exchange  of  commodities,  the  first  effect 
of  the  division  of  labor  ;  then  to  that  of  money  as  the 


*  Wealth  of  Nations,  Book  I,  chapter  i,  p.  6.  The  page  numbers 
given  here  and  elsewhere  for  the  Wealth  of  Nations,  refer  to  M'Culloch's 
edition.  I  have  quoted  only  a  part  of  this  closing  paragraph  in  the  chap- 
ter :  enough  to  indicate  its  character. 


WAGES  AND  CAPITAL. 

medium  of  exchange  ;  then  to  price,  and  the  component 
parts  of  price  ;  and  so  to  wages,  profits,  and  rent,  as  the 
component  parts  of  the  price  of  commodities.  His  first 
Book,  whose  main  subject  is  announced  in  the  introduc- 
tion to  be  "the  causes  of  the  improvement  in  the  pro- 
ductive powers  of  labor,"  is  thus  occupied  largely  with  the 
subject  of  distribution. 

This  is  one  of  the  many  incongruities  in  the  marshal- 
ling of  the  matter  of  the  Wealth  of  Nations, — incongruities 
ascribable  to  the  difficulty  of  presenting  in  systematic 
fashion  so  great  a  mass  of  new  reasoning,  new  facts,  new 
conclusions.  Another  of  the  consequences  of  the  division 
of  labor  might  have  been  advantageously  taken  up  before 
entering  on  the  discussion  of  distribution  ;  but  it  does  not 
appear  until  the  first  Book,  with  all  its  details  and  digres- 
sions, is  done  with,  and  the  second  Book,  on  capital,  is  in- 
troduced. The  division  of  labor  brings  not  only  the  co- 
operation of  many  thousands  of  laborers  and  the  exchange 
of  their  products,  but  the  succession,  step  by  step,  of  dif- 
ferent stages  in  the  processes  of  production,  and  so  the 
spreading  of  labor  over  a  considerable  time.  With  the 
element  of  time,  capital  appears.  The  best  way  of  intro- 
ducing the  uninitiated  reader  to  the  fundamental  truths 
of  economics  would  be  to  bring  close  together  at  the  out- 
set the  three  topics  between  which  Adam  Smith  has  inter- 
posed his  long  account  of  distribution, — the  division  of 
labor,  the  use  of  money,  and  the  nature  and  functions?  of 
capital.  One  consequence  of  their  separation  in  the 
Wealth  of  Nations  is  that  passages  under  each  head,  not 
professedly  connected  with  each  other,  need  to  be  put 
together  in  order  to  get  a  full  understanding  of  the 
author's  conclusions ;  while  another  consequence  prob- 
ably is  that  Adam  Smith  himself  missed  conclusions  that 
would  have  suggested  themselves  from  a  more  compact 
exposition  of  these  related  subjects. 


ADAM    SMITH. 


137 


When  Adam  Smith,  after  long  digressions,  gets  to  the 
third  of  the  topics  just  mentioned, — the  functions  of  capi- 
tal,— he  recurs  to  the  first  and  fundamental  thought.  The 
second  Book,  whose  subject  is  described  as  "  the  Nature, 
Accumulation,  and  Employment  of  Stock,"  begins  thus,  in 
the  Introduction  : 

In  that  rude  state  of  society  in  which  there  is  no  division  of 
labour,  in  which  exchanges  are  seldom  made,  and  in  which  every 
man  provides  everything  for  himself,  it  is  not  necessary  that  any 
stock  should  be  accumulated  or  stored  up  beforehand,  in  order  to 
carry  on  the  business  of  society.  Every  man  endeavours  to  sup- 
ply by  his  own  industry  his  own  occasional  wants  as  they  occur. 
When  he  is  hungry,  he  goes  to  the  forest  to  hunt  ;  when  his  coat  is 
worn  out,  he  clothes  himself  with  the  skin  of  the  first  large  animal 
he  kills  ;  and  when  his  hut  begins  to  go  to  ruin,  he  repairs  it,  as  well 
as  he  can,  with  the  trees  and  the  turf  that  are -nearest  it. 

But  when  the  division  of  labour  has  once  been  thoroughly  intro- 
duced, the  produce  of  a  man's  own  labour  can  supply  but  a  very 
small  part  of  his  occasional  wants.  The  far  greater  part  of  them 
are  supplied  by  the  produce  of  other  men's  labour,  which  he  pur- 
chases with  the  produce  of,  or  what  is  the  same  thing,  with  the 
price  of  the  produce  of  his  own.  But  this  purchase  can  not  be 
made  till  such  time  as  the  produce  of  his  own  labour  has  not  only 
been  completed,  but  sold.  A  stock  of  goods  of  different  kinds, 
therefore,  must  be  stored  up  somewhere  sufficient  to  maintain  him, 
and  to  supply  him  with  the  materials  and  tools  of  his  work,  till  such 
time,  at  least,  as  both  these  events  can  be  brought  about.  A  weaver 
can  not  apply  himself  entirely  to  his  peculiar  business,  unless  there  is 
beforehand  stored  up  somewhere,  either  in  his  own  possession  or  in 
that  of  some  other  person,  a  stock  sufficient  to  maintain  him,  and 
to  supply  him  with  the  materials  and  tools  of  his  work,  till  he  has 
not  only  completed,  but  sold  his  web.  This  accumulation  must, 
evidently,  be  previous  to  his  applying  his  industry  for  so  long  a 
time  to  such  a  peculiar  business.* 

*  Wealth  of  Nations^  Book  II.  Introduction,  pp.  118,  119. 

Thirty  years  later,  a  writer  conversant  with  the  writings  of  Adam 


^8  WAGES   AND   CAPITAL. 

Here  the  essential  function  of  capital  is  clearly  ex- 
plained. It  enables  labor  to  be  spread  over  a  long  period, 
and  so  makes  possible  the  division  of  labor  and  that  de- 
velopment of  the  arts  under  the  division  of  labor,  which 
are  the  main  causes  of  the  efficiency  of  civilized  industry. 
The  analysis,  it  is  true,  is  not  complete.  The  process  of 
production  is  regarded  from  the  point  of  view  of  the  indi- 
vidual producer.  When  the  weaver  ha-s  completed  and 
sold  his  web,  capital  is  supposed  to  be  no  longer  needed. 
It  has  been  shown,  in  the  first  part  of  the  present  volume, 
that  capital  performs  its  functions  not  by  enabling  the 
individual  to  carry  on  his  operations  until  he  gets  a  sala- 
ble commodity,  but  by  enabling  society  as  a  whole  to 
carry  on  complicated  operations  involving  a  long  interval 
between  the  beginning  of  production  and  the  final  enjoy- 
able commodity.  Though  Adam  Smith  had  himself  given 
warning,  often  enough,  against  confounding  the  needs  of 
the  community  with  those  of  the  individual,  it  is  not  sur- 
prising that  he  should  himself  have  failed  to  observe  the 
distinction  in  this,  the  most  intricate  part  of  the  whole 
subject.  As  will  appear  more  fully  in  the  coming  chap- 
Smith  and  his  immediate  followers,  expounded  this  matter  as  follows  : 
"  The  accumulation  of  capital  is  necessary  to  that  division  of  labour  by 
which  its  productive  powers  arc  increased,  and  its  total  amount  dimin- 
ished. .  .  .  The  accumulation  of  stock  enables  one  class  of  men  to  work 
in  any  line  cheaper  for  the  rest  of  the  community,  than  if  each  class 
worked  in  every  line  for  itself.  The  immediate  saving  of  labour  is  here 
occasioned  by  its  subdivision.  It  is  a  consequence  of  the  same  accumu- 
lation of  stock,  that  one  class  of  men  collects  the  articles  necessary  for 
the  others  all  at  once,  and  thus  saves  each  the  necessity  of  collecting  for 
itself,  which  would  be  a  repetition  of  the  same  toil  for  every  transaction. 
This  saving,  too,  is  occasioned  by  the  division  of  labour  ;  and  all  writers 
have  agreed  in  giving  the  same  account  of  the  connection  between  the 
division  of  labour  and  the  accumulation  of  stock."  Edinburgh  A'iZ'n"!f, 
vol.  iv,  p.  370;  the  article  being  a  severe  review  of  Lord  Lauderdale's 
Inquiry  into  the  Nature  and  Origin  of  Public  Wealth. 


ADAM    SMITH. 


139 


ters,  most  writers  after  him,  to  our  own  time,  have  stopped 
short  at  the  same  point  in  analyzing  the  function  of 
capital. 

It  suffices  for  the  present  subject  to  consider  very 
briefly  the  further  analysis  by  Adam  Smith  of  the  func- 
tions of  capital.  Not  only  is  it  essential  to  the  division 
of  labor,  but  it  increases  the  productive  powers  of  labor  ; 
it  employs  "  productive  "  labor,  and  stimulates  industry. 
Its  effects  in  getting  raw  produce  from  the  land,  in  manu- 
factures, in  wholesale  trade,  in  retail  trade,  are  examined 
and  classified.  Certain  fundamental  propositions,  which 
have  made  their  influence  felt  in  all  the  literature  of  eco- 
nomics, first  appear  in  developed  form  in  the  Wealth  of 
Nations, — that  capital  is  the  result  of  saving;  that  it  is 
perpetually  consumed  and  reproduced ;  that  industry  is 
limited  by  capital.  On  some  of  these  topics  the  reasoning 
is  carried  only  half  way  ; — thus  on  the  mode  in  which 
capital  limits  industry,  and,  as  has  just  been  stated,  on 
the  connection  between  capital  and  the  division  of  labor. 
On  others,  while  the  fundamental  propositions  laid  down 
by  Adam  Smith  can  not  be  shaken,  he  gave  an  undue 
emphasis  to  some  corollaries;  as  in  the  excessive  eulogy 
on  parsimony  which  he  attached  to  the  solid  truth  that 
capital  had  its  origin  in  saving.  In  all  this  the  order  is 
again  confusing,  and  appears  to  be  largely  a  matter  of 
accident:  a  defect  which  is  due, — to  repeat  what  was  said 
a  moment  ago, — to  the  fact  that  his  analysis  of  the  whole 
subject  was  practically  a  new  birth.* 

We   may  turn  now  to    that  part  of  the   discussion  of 

*  Mr.  Edwin  Cannan,  in  his  History  of  the  Theories  of  Production 
and  Distribution  in  English  Political  Economy  from  ^776  to  1848,  has 
given  an  excellent  critical  account  of  Adam  Smith's  doctrines  on  produc- 
tion and  distribution  ;  an  account  which  comes  short  of  justice,  however, 
in  that  Mr.  Cannan  could  not  warm  himself  to  some  cordial  recognition 
of  the  credit  to  which  the  great  Scotchman  is  entitled. 


140 


WAGES   AND   CAPITAL. 


capital  which  bears  more  directly  on  the  question  of 
wages.  The  eighth  chapter  of  the  first  Book  of  the 
Wealth  of  Nations  treats  of  the  Wages  of  Labour  :  the  first 
deliberate  and  extended  treatment  of  that  subject  in  the 
literature  of  economics.  In  Adam  Smith's  arrangement 
of  his  matter,  it  comes  before  the  discussion  of  capital  in 
the  second  Book ;  but  the  doctrines  set  forth  in  the  later 
passages  were  clearly  in  his  mind  when  writing  the  earlier. 
The  oft-quoted  opening  paragraphs  of  the  chapter  on 
wages  are,  in  their  essential  parts,  as  follows  : 

In  that  original  state  of  things  which  preceded  both  the  appro, 
priation  of  land  and  the  accumulation  of  stock,  the  whole  produce 
of  labour  belongs  to  the  labourer.  .  .  .  But  this  original  state  of 
things  .  .  .  could  not  last  beyond  the  first  introduction  of  the  ap- 
propriation of  land  and  the  accumulation  of  stock.  It  was  at  an 
end,  therefore,  long  before  the  most  considerable  improvements 
were  made  in  the  productive  powers  of  labour.  .  .  . 

It  seldom  happens  that  the  person  who  tills  the  ground  has 
wherewithal  to  maintain  himself  till  he  reaps  the  harvest.  His 
maintenance  is  generally  advanced  to  him  from  the  stock  of  a 
master,  the  farmer  who  employs  him.  ...  In  all  arts  and  manu- 
factures the  greater  part  of  the  workmen  stand  in  need  of  a  master 
to  advance  them  the  materials  of  their  work,  and  their  wages  and 
maintenance  till  it  be  completed.  .  .  . 

It  sometimes  happens,  indeed,  that  a  single  independent  work- 
man has  stock  sufficient  both  to  purchase  the  materials  of  his  work, 
and  to  maintain  himself  till  it  be  completed.  He  is  both  master 
and  workman,  and  enjoys  the  whole  produce  of  his  own  labour, 
or  the  whole  value  which  it  adds  to  the  materials  on  which  it  is 
bestowed.  .  .  .  Such  cases,  however,  are  not  very  frequent,  and  in 
every  part  of  Europe,  twenty  workmen  serve  under  a  master  for  one 
that  is  independent  ;  and  the  wages  of  labour  are  everywhere  un- 
derstood to  be,  what  they  usually  are,  when  the  labourer  is  one 
person,  and  the  owner  of  the  stock  which  employs  him  another.* 

*  Wealth  of  Xations,  Book  I,  ch.  viii,  p.  29.  In  these  excerpts,  I 
have  retained  only  the  passages  referring  directly  to  wages,  omitting 


ADAM    SMITH. 


141 


Here  we  have  two  fundamental  propositions.  First, 
that  in  civilized  industry  maintenance  must  be  provided 
for  some  considerable  time,  until  the  product  is  completed. 
The  division  of  labor  is  not  referred  to,  in  terms,  as  the 
essence  of  the  "improvements  in  the  productive  powers  of 
labor  "  which  cause  the  need  of  such  maintenance;  but 
that  Adam  Smith  had  this  in  mind,  is  clear  from  the  other 
passages,  already  quoted,  in  earlier  and  later  parts  of  his 
treatise.  As  in  the  later  account  of  capital,  the  time  dur- 
ing which  maintenance  must  be  provided  is  not  described 
with  regard  to  the  final  attainment  of  enjoyable  goods; 
it  is  that  which  elapses  until  the  particular  product  in  hand 
is  ready  for  market.  When  the  harvest  is  reaped,  when  the 
specific  work  in  hand  is  "  completed,"  the  need  of  main- 
tenance is  supposed  to  cease.  Secondly,  we  have  the 
proposition  that  the  needed  supplies  of  food  and  materials 
are  rarely  owned  by  the  workmen,  and  that  hired  laborers 
get  their  wages  through  a  bargain  with  employers.  How 
it  happens  that  workmen  hardly  ever  own  "  stock  "  suffi- 
cient for  their  materials  and  maintenance,  Adam  Smith 
does  not  stop  to  inquire;  nor,  for  that  matter,  did  any  of 
the  economists  who  came  after  him,  until,  in  our  own  day, 
the  assaults  of  the  socialists  compelled  attention  to  the 
origin  and  justification  of  the  unequal  division  of  wealth. 
But  Adam  Smith  was  at  least  aware  that  the  historical  fact 
of  unequal  distribution  was  an  essential  premise  to  his 
reasoning  on  wages,  and  in  that  regard  saw  the  situation 
more  clearly  than  many  of  his  immediate  successors. 

Wages,  then,  "  depend  everywhere  upon  the  contract 
usually  made  between  these  two  parties,"  the  workmen 
and  the  masters.  The  conditions  under  which  the  bargain 
is  made,  and  the  extent  and  limit  of  the  demand  for 


those  which  describe  rent  and  profits  as  "  deductions  from  the  produce 
of  labor." 


142 


WAGES   AND   CAPITAL. 


labor  by  the  masters,  presently  come  up  for  considera- 
tion. 

The  demand  for  those  who  live  by  wages,  it  is  evident,  cannot 
increase  but  in  proportion  to  the  increase  of  the  funds  which  are 
destined  for  the  payment  of  wages.  These  funds  are  of  two  kinds  : 
first,  the  revenue  which  is  over  and  above  what  is  necessary  for  the 
maintenance ;  and  secondly,  the  stock  which  is  over  and  above 
what  is  necessary  for  the  employment  of  the  masters. 

When  the  landlord,  annuitant,  or  moneyed  man,  has  a  greater 
revenue  than  what  he  judges  sufficient  to  maintain  his  own  family, 
he  employs  either  the  whole  or  a  part  of  the  surplus  in  maintaining 
one  or  more  servants.  Increase  this  surplus,  and  he  will  naturally 
increase  the  number  of  those  servants. 

When  an  independent  workman,  such  as  a  weaver  or  shoe- 
maker, has  got  more  stock  than  what  is  sufficient  to  purchase  the 
materials  of  his  own  work,  and  to  maintain  himself  till  he  can  dis- 
pose of  it,  he  naturally  employs  one  or  more  journeymen  with  the 
surplus,  in  order  to  make  a  profit  by  their  work.  Increase  this  sur- 
plus, and  he  will  naturally  increase  the  number  of  his  journey- 
men. 

The  demand  for  those  who  live  by  wages,  therefore,  necessarily 
increases  with  the  increase  of  the  revenue  and  stock  of  every  coun- 
try, and  cannot  possibly  increase  without  it.  The  increase  of  reve- 
nue and  stock  is  the  increase  of  national  wealth.  The  demand  for 
those  who  live  by  wages,  therefore,  naturally  increases  with  the 
increase  of  national  wealth,  and  cannot  possibly  increase  with- 
out it.* 

Here  are  mentioned  two  sources  of  demand  for  labor, 
"  revenue  "  and  "  stock." 

"  Revenue  "  evidently  means  what  is  spent  for  servants 
and  retainers,  hired  by  the  employer  for  the  direct  satis- 
faction of  his  own  wants  or  whims.  When  Adam  Smith 
gets  to  the  elaborate  treatment  of  stock  and  capital  in  his 
second  Book,  he  has  much  more  to  say  of  laborers  hired 
from  revenue.  They  are  "unproductive"  laborers;  and 

*  Book  I,  ch.  viii,  p.  31. 


ADAM    SMITH. 


143 


what  is  spent  on  them  is  "  prodigality,"  and  entails  pure 
loss  to  the  community.* 

Without  going  into  any  extended  consideration  of  the 
outlying  topics  which  these  distinctions  suggest,  we  may 
note  how  the  discussion  of  this  part  of  the  demand  for 
labor,  scattered  as  it  is  through  various  passages  of  the 
Wealth  of  Nations,  illustrates  both  the  strength  and  the 
weakness  of  Adam  Smith's  treatment  of  the  course  of  pro- 
duction and  distribution.  His  historical  knowledge  and 
practical  bent  led  him  to  give  more  attention  to  the  de- 
mand for  "  unproductive  "  labor  than  was  given  to  it  by 
his  successors.  He  was  living  at  a  time  when  luxury  still 
took  in  large  part  the  form  of  a  great  retinue  of  servants; 
though  it  was  beginning  to  take  more  and  more  the  mod- 
ern form  of  the  purchase  of  commodities  from  capitalist 
middlemen,  who  have  hired  the  laborers  ministering  to  the 
wants  and  caprices  of  the  rich.  He  reasoned  as  if  the  dif- 
ference were  of  vital  consequence  to  the  community  :  the 
one  course  was  the  result  of  "  prodigality  "  and  led  to 

*  Book  II,  ch.  iii,  p.  147.  Some  of  the  passages  may  be  quoted  in 
which  Adam  Smith  mentions  cases  of  "  prodigality  "  such  as  he  had  in 
mind  when  describing  the  effects  of  this  form  of  the  demand  for  labor. 
"  In  those  towns  which  are  principally  supported  by  the  constant  or  occa- 
sional residence  of  a  court,  and  in  which  the  inferior  ranks  of  people  are 
chiefly  maintained  by  the  spending  of  revenue,  they  are  in  general  idle, 
dissolute,  and  poor  ;  as  at  Rome,  Versailles,  Compiegne,  and  Fontaine- 
bleau."  (P.  148.)  And  again  :  "  In  a  country  which  has  neither  foreign 
commerce,  nor  any  of  the  finer  manufactures,  a  great  proprietor,  having 
nothing  for  which  he  can  exchange  the  greater  part  of  the  produce  of  his 
lands  which  is  over  and  above  the  maintenance  of  the  cultivators,  con- 
sumes the  whole  in  rustic  hospitality  at  home.  If  this  surplus  produce 
is  sufficient  to  maintain  a  hundred  or  a  thousand  men,  he  can  make  use 
of  it  in  no  other  way  than  by  maintaining  a  hundred  or  a  thousand  men. 
.  .  .  The  great  Earl  of  Warwick  is  said  to  have  entertained  every  day  at 
his  different  manors,  thirty  thousand  people  ;  and  though  the  number 
may  have  been  exaggerated,  it  must  have  been  very  great  to  admit  of 
such  exaggeration."  Book  III,  ch.  iv,  p.  182. 
ii 


144 


WAGES   AND   CAPITAL. 


waste,  while  the  other  entailed  "  parsimony  "  and  brought 
progress.  There  may  be  an  important  element  of  truth 
in  the  proposition  that  the  workman  hired  by  the  capital- 
ist is  likely  to  be  more  sober  and  industrious  than  the 
retainer  of  the  nobleman;*  and  there  are  important  so- 
cial consequences  from  the  rise  of  a  class  of  capitalist  en- 
trepreneurs. But  clearly  the  direction  of  production  and 
consumption  remains  the  same  at  bottom,  whether  the 
unequal  distribution  of  wealth  works  itself  out  in  one  way 
or  the  other.  All  laborers  employed  out  of  "revenue" 
are  supposed  to  be  unproductive ;  a  proposition  which,  in 
any  larger  consideration  of  wants  and  their  satisfaction, 
is  crude  and  untenable.  The  further  conclusions  to  which 
Adam  Smith  was  thus  led,  in  his  consideration  of  "  unpro- 
ductive "  labor,  while  consistent  in  themselves,  are  unsat- 
isfactory enough.  They  go  with  that  undue  emphasis 
which  the  classic  economists,  following  his  lead,  put  on 
the  mere  accumulation  of  capital  as  the  one  thing  needful 
for  public  prosperity.  But  he  was  certainly  right  on  one 
point:  in  maintaining  that  the  demand  for  "unproduc- 
tive "  labor  occurred  under  different  conditions  and  with 
a  different  play  of  motives  from  those  which  appear  in  the 
case  of  "productive"  labor.  In  so  far,  he  showed  his  in- 
sight into  the  complexities  of  real  life,  and  set  an  example 
of  close  attention  to  varied  facts  which  might  have  been 
usefully  followed  by  the  long  series  of  his  admirers  and 
expositors. 

On  the  second  and  more  important  part  of  the  demand 
for  labor, — that  which  comes  from  "  stock," — it  is  less  easy 
to  make  the  different  parts  of  the  Wealth  of  Nations  hang 

*  On  the  probability  of  "  the  cultivation  of  the  soil  with  the  same  kind 
of  indolence  and  slackness  as  in  the  feudal  times,"  under  such  a  direction 
of  luxurious  expenditure,  see  an  interesting  passage,  evidently  reflecting 
Adam  Smith's  views,  in  Malthus's  Political  Economy,  second  edition, 
P-  235- 


ADAM    SMITH.  !45 

together.  Sometimes,  indeed  most  commonly,  this  "stock  " 
is  conceived  in  terms  of  money,  or  as  consisting  of  funds 
in  the  hands  of  the  immediate  employer.  Sometimes  the 
money  payments  are  described  as  of  no  essential  impor- 
tance, as  only  steps  toward  the  distribution  of  real 
wages.  The  uncertainty  and  confusion  which  thus 
showed  itself  in  Adam  Smith  continued  to  appear  in  al- 
most all  the  discussions  of  wages  for  fully  a  century 
after  his  time. 

The  phrases  "funds  destined  for  the  maintenance  of 
labour,"  and  "  funds  destined  for  the  payment  of  wages," 
occur  again  and  again  :  they  are  the  undoubted  parent  of 
the  word  "  wages-fund  "  as  it  is  used  in  later  literature. 
Sometimes,  "  capital  "  and  "  stock  "  are  used  to  denote  the 
source  of  wages.  In  the  chapter  on  profits,  we  find  all 
these  phrases  used  interchangeably  :  "  The  diminution  of 
the  capital  stock  of  the  society,  or  of  the  funds  destined 
for  the  maintenance  of  labor,  as  it  lowers  the  wages  of 
labour,  so  it  raises  the  profits  of  stock."  *  Whichever 
words  were  used,  Adam  Smith,  when  speaking  directly  of 
wages,  seems  to  have  conceived  of  their  source  simply  as 
funds  in  the  hands  of  the  immediate  employer.  In  the 
passage  quoted  a  few  moments  ago,f  again  from  the  chap- 
ter on  wages,  the  "  stock  "  of  the  master  is  apparently 
thought  of  in  terms  of  money.  It  is  the  amount  over 
"what  is  sufficient  to  purchase  the  materials  of  his  own 
work,  and  to  maintain  himself  till  he  can  dispose  of 
it."  In  the  later  discussion  of  fixed  and  circulating 
capital,  in  the  second  Book,  we  read  that  "  that  part  of 
the  capital  of  the  farmer  .  .  .  which  is  employed  in  the 
wages  and  maintenance  of  his  labouring  servants  is  a 
circulating  capital. "J  The  funds  controlled  by  the  im- 


Book  I,  ch.  ix,  p.  43.  f  At  p.  142. 

Book  II,  ch.  i,  p.  120. 


I46  WAGES   AND  CAPITAL. 

mediate  employer  would  seem  to  be  referred  to  in  all 
these  passages. 

On  the  other  hand,  when  the  independent  discussion 
of  capital  is  undertaken,  in  the  second  Book,  a  different 
view  appears.  Here  Adam  Smith  comes  so  much  nearer 
the  truth, — indeed,  states  the  essential  truth  so  clearly, — 
that  it  is  surprising  he  did  not  turn  back  to  his  chapter  on 
wages  in  the  first  Book,  and  remodel  its  matter  and  its 
phrases.  The  same  remark  might  be  made,  to  be  sure,  of 
many  passages  in  the  Wealth  of  Nations.  On  a  great  range 
of  topics, — rent,  profits,  value,  international  trade, — there 
are  flashes  of  insight,  pregnant  statements,  which  yet  fail 
to  be  carried  to  their  last  consequences. 

The  "  stock  "  of  society  is  divided,  in  the  second  Book, 
into  two  parts  :  the  "  stock,"  in  a  narrower  sense,  of  finished 
commodities  which  is  "reserved"  for  immediate  consump- 
tion; and  the  "capital,"  whether  fixed  or  circulating, 
which  is  expected  to  afford  a  revenue.  The  distinction 
between  fixed  and  circulating  capital,  (very  different  from 
that  which  became  traditional  with  later  writers)  is  largely 
fanciful ;  but  the  confusion  here  does  not  affect  the  part 
of  the  reasoning  that  bears  on  our  present  subject.  It  is 
under  the  head  of  circulating  capital,  that  we  should  ex- 
pect a  consideration  of  those  forms  of  capital  which  make 
the  demand  for  what  Adam  Smith  called  "  productive  " 
labor.  Either  the  money  funds  in  the  hands  of  the  imme- 
diate employer,  or  the  finished  consumable  commodities 
on  which  the  laborers  spend  their  money  wages,  might 
here  be  given  the  chief  emphasis.  Both  of  them,  in  fact, 
receive  their  share  of  attention,  and  both  are  discussed  in 
curious  harmony  with  distinctions  and  definitions  that 
have  come  to  the  front  again  in  very  recent  times;  while 
yet,  under  either  head,  the  reasoning  is  not  carried  to  its 
logical  conclusion  as  to  the  real  and  important  source  of 
wages. 


ADAM    SMITH. 


147 


Adam  Smith  rightly  treats  the  commodities  which  in 
one  sense  are  finished,  but  are  not  yet  in  consumers'  hands, 
as  capital.  "  The  stock  of  provisions  which  are  in  the 
possession  of  the  butcher,  the  grazier,  the  farmer,  the 
corn  merchant,"  and  "  the  work  which  is  made  up  and 
completed,  but  which  is  still  in  the  hands  of  the  merchant 
or  manufacturer,  and  not  yet  disposed  of  or  distributed  to 
their  proper  consumers," — these  are  parts  of  circulating 
capital.*  Adam  Smith  did  not  indeed  call  them  capital 
for  the  reason  which  would  nowadays  be  given  :  that  the 
butcher  and  merchant  do  a  share  of  helpful  work  in  pro- 
duction, and  that  goods  in  their  hands  are  wealth  not  yet 
enjoyable.  But  the  essence  of  the  situation  was  grasped 
by  him,  even  if  all  its  connections  and  consequences  were 
not  perceived.  Adam  Smith  had  defined  capital  as  that 
which  yielded  a  revenue;  whence  it  would  have  followed, 
that  a  dwelling  house  or  a  suit  of  clothes,  if  let  for  hire 
by  the  owner,  became  capital.  Nevertheless  he  qualifies 
his  general  definition  at  this  point :  such  revenue-yielding 
commodities  belong  not  to  the  community's  capital,  but  to 
its  stock  reserved  for  immediate  consumption.  "  The  stock 
of  food,  clothes,  household  furniture,  etc.,  which  have  been 
purchased  by  their  proper  consumers,  but  which  are  not 
yet  entirely  consumed,"  are  not  capital  :  they  are  realized 
income.  But  "  work  which  is  made  up  and  completed, 
but  which  is  still  in  the  hands  of  the  manufacturer  and 
merchant,  and  not  yet  disposed  of  or  distributed  to  the 
proper  consumers  :  such  as  the  finished  work  which  we 
frequently  find  ready-made  in  the  shops  of  the  smith,  the 
cabinet-maker,  the  goldsmith,  the  jeweller,  the  china- 
merchant," — all  this  is  part  of  capital,  being  not  yet  in 
the  hands  of  the  "proper  consumer."!  At  this  point 
Adam  Smith  might  be  expected  to  look  for  the  capital 

*  Book  II,  ch.  i,  p.  122.  f  Book  II,  ch.  i,  pp.  121,  122. 


I48  WAGES   AND   CAPITAL. 

which  is  the  immediate  real  source  of  wages,  as  of  all 
other  income, — the  consumable  goods,  in  dealers'  hands, 
ready  for  purchase  by  laborers.  But  he  never  did  so. 
The  illustration  which  he  used  for  bringing  out  his  mean- 
ing as  to  this  form  of  circulating  capital  is  "the  finished 
work  which  we  frequently  find  ready-made  in  the  shops 
of  the  smith,  the  cabinet-maker,  the  goldsmith,  the  jewel- 
ler, the  china-merchant,  etc."  The  simpler  goods  which 
laborers  will  buy  obviously  belong  in  the  same  class ; 
they  are  capital  in  the  same  sense  and  for  the  same  rea- 
son. But  Adam  Smith's  thought  seems  turned  to  these 
only  in  dealing  with  other  subjects,  and  never  in  connec- 
tion with  the  payment  of  wages  out  of  capital.  The  hints 
which  he  gave,  the  acute  distinctions  which  he  suggested, 
if  followed  to  their  consequences,  might  easily  have  led  to 
the  development  of  a  theory  of  wages  that  would  have 
kept  close  to  the  concrete  facts,  and  avoided  the  vague 
generalizations  of  the  wages  fund  doctrine  of  later  days. 
Adam  Smith  himself  never  followed  them  out  ;  his  success- 
ors did  even  less  ;  and  thus  the  passages  which  have  here 
been  cited  make  the  impression  of  curious  but  unfruitful 
anticipations  of  the  essential  truths. 

So  far  as  money  and  money  wages,  and  the  place  of 
money  in  capital,  are  concerned,  Adam  Smith's  direct  dis- 
cussion is  admirable;  and  the  substantial  ground  for  criti- 
cism can  again  be  only  that  the  truths  here  set  forth  were 
not  brought  to  bear  more  fully  on  the  question  of  real 
wages.  While  he  classes  money  as  part  of  circulating 
capital,  he  notes  the  peculiar  place  which  it  has  in  the 
capital  of  the  community.  It  never  wears  out :  hence 
"the  fixed  capital,  and  that  part  of  circulating  capital 
which  consists  in  money,  .  .  .  bear  a  great  resemblance  to 
one  another."  *  Money  has  a  place  of  its  own  ;  he  de- 

*  Book  II,  ch.  ii,  p.  125. 


ADAM   SMITH.  !40 

scribes  it,  in  language  used  with  frequent  emphasis,  as 
simply  "the  great  wheel  of  circulation,"  and  as  "alto- 
gether different  from  the  goods  which  are  circulated  by 
means  of  it."  The  real  revenue  of  society,  and  of  each 
individual  in  society,  is  in  "the  quantity  of  consumable 
goods  which  they  can  all  of  them  purchase  with  this 
money."  *  This  simple  and  oft-neglected  truth  he  dwells 
on  at  length,  having  an  eye  on  the  familiar  fallacies  of  the 
mercantile  writers,  to  which  he  was  giving  the  finishing 
stroke.  And  yet,  as  we  have  seen,  when  capital  is  re- 
garded as  the  source  of  demand  for  labor,  he  seems  to 
think  of  the  money  funds  with  which  the  employer  pays 
the  hired  laborer.  It  is  true  that  a  case  to  which  he  often 
refers,  by  way  of  illustrating  the  need  of  advances  to  the 
laborer,  is  that  of  the  farmer,  maintaining  his  laborers  at 
his  own  table,  and  so  owning  in  natura  the  capital  which 
remunerates  them :  a  case  which  emerges  again  and  again 
in  later  literature.  But  Adam  Smith  usually  has  in  mind 
the  very  different  conditions  which  in  fact  prevail  in  the 
modern  world.  He  describes  a  society  with  a  developed 
money  regime,  in  which  all  income  appears  first  in  the  form 
of  money  payments  and  money  rights.  He  does  not  fail 
to  point  out,  with  emphasis,  the  simple  distinction  between 
money  wages  and  real  wages ;  but  he  never  goes  into  any 
further  detail  as  to  the  connection  between  the  two,  or  as 
to  the  nature  and  determination  of  the  flow  of  consumable 
commodities  whence  real  wages  must  come.  Here,  as  on 
the  question  of  the  place  of  such  commodities  in  "  stock  " 
or  "  capital,"  he  advanced  without  error  to  a  certain  point, 
and  then  stopped  short. 

No  doubt  the  reason  why  Adam  Smith  failed  to  carry 
further  his  reasoning  both  as  to  the  relation  between 
money  wages  and  real  capital,  and  as  to  the  place  of 

*  Book  II,  ch.  ii,  pp.  125,  126. 


150  WAGES   AND    CAPITAL. 

dealers'  stocks  in  social  capital,  is  to  be  found  in  his 
mistaken  view  as  to  the  extension  of  the  productive 
cycle.  He  thought  of  production  piece  by  piece.  The 
employer  needed  funds  with  which  to  pay  laborers  sim- 
ply until  the  product  was  salable:  the  need  of  advances  t 
ceased  when  the  particular  article  in  hand  was  com- 
pleted. This  simple  every-day  operation  is  easily  con- 
founded with  the  larger  and  more  intricate  process  by 
which  the  labor  of  the  whole  community  is  spread  over 
a  lengthened  period.  Many  writers  after  Adam  Smith 
have  been  guilty  here  of  much  worse  confusion :  the 
great  master's  fault  was  one  of  inattention  rather  than  of 
express  error. 

To  sum  up  the  theory  of  capital  and  wages,  as  it  stood 
with  the  appearance  of  the  Wealth  of  Nations.  Adam 
Smith  had  shown  that,  in  a  society  having  a  developed 
division  of  labor,  the  process  of  production  was  spread 
over  some  length  of  time,  and  that  for  the  laborers  in 
such  a  society  subsistence  must  be  provided  until  their 
present  labor  should  result  in  finished  goods  in  the  future. 
How  great  this  provision  must  be,  was  not  indeed  consid- 
ered with  a  full  appreciation  of  the  position  of  the  whole 
community  ;  but  the  fundamental  fact  had  been  clearly 
pointed  out.  Further,  he  had  shown  that,  under  the  un- 
equal distribution  of  wealth  in  modern  societies,  the  sup- 
plies from  which  laborers  must  for  the  moment  get  their 
subsistence,  are  in  the  hands  of  others:  hence  laborers 
get  them  by  a  bargain  with  those  others.  Exactly 
what  the  employers  have  to  offer  in  that  bargain,  he 
did  not  consistently  and  fully  set  forth.  Some  of  them 
have  "revenue,"  more  of  them  have  "capital"  and 
"  funds,"  with  which  they  remunerate  labor.  All  labor- 
ers hired  by  those  who  employ  them  for  gain  from 
the  sale  of  the  product,  are  dependent  on  advances 
from  the  capital  of  the  employers.  l>ut  what  that 


ADAM   SMITH.  15! 

capital  consists  of,  is  not  clearly  stated.  The  remarkable 
analysis  of  capital  in  the  second  Book  might  easily 
have  led  the  way  to  a  more  explicit  statement :  but 
Adam  Smith  did  not  advance  farther  on  the  path  which 
he  here  opened. 


CHAPTER   VIII. 

THE    IMMEDIATE    FOLLOWERS    OF    ADAM    SMITH. 

IN  the  ferment  of  economic  discussion  which  followed 
the  appearance  of  the  Wealth  of  Nations,  other  subjects 
than  those  with  which  the  present  investigation  is  con- 
cerned, were  uppermost.  Attention  was  given  chiefly  to 
'external  and  internal  commerce,  and  so  to  the  questions 
of  free-trade  without  and  of  unshackled  industry  within. 
Adam  Smith's  was  a  catholic  mind,  and  he  had  the  in- 
terests both  of  the  scientific  thinker  and  the  practical 
agitator.  But  his  immediate  followers  laid  stress  mainly 
on  those  parts  of  the  subject  in  which  he  had  called  for 
prompt  legislative  reforms.  It  was  the  drift  of  the  time, 
too,  to  treat  economics  chiefly  with  reference  to  produc- 
tion. The  path  of  progress  was  believed  to  be  by  the 
increase  of  the  production  of  wealth.  This  was  to  be 
secured  chiefly  by  freeing  exchange  from  all  restrictions. 
So  much  done,  general  prosperity  must  follow.  Not  until 
the  middle  of  the  present  century,  when  the  complaints  of 
the  socialists  began  to  demand  attention  in  louder  and 
louder  tones,  did  distribution  become  the  central  problem 
in  economic  reasoning. 

The  urgency  of  some  immediate  loosening  of  restrictive 
legislation,  and  the  importance  attached  to  problems  of 
production,  thus  caused  Adam  Smith's  treatment  of  wages 
and  capital  to  receive  comparatively  little  attention. 
What  was  said  by  his  immediate  successors  on  this  topic, 

152 


THE  IMMEDIATE  FOLLOWERS  OF  ADAM  SMITH. 


153 


was  chiefly  in  acceptance  of  his  views.  So  far  from  carry- 
ing his  reasoning  further,  the  economists  of  the  next  thirty 
years  rarely  succeeded  in  getting  as  far  as  he  did.  What 
was  the  general  situation,  will  appear  from  an  examina- 
tion of  the  more  prominent  writers,  both  among  those 
who  accepted  the  doctrines  of  the  Wealth  of  Nations  with 
unquestioning  loyalty,  and  those  who  ventured  to  differ, 
on  one  point  or  another,  with  their  acknowledged  master. 
In  France,  the  leavening  influence  of  the  Physiocrats, 
and  the  upheaval  of  the  Revolution,  prepared  the  way  for 
a  more  rapid  advance  in  economic  thinking  than  at  first 
appeared  in  England.  Among  the  writers  who  took  up 
the  cause  of  reform,  none  was  more  enthusiastic  than  the 
historian  Sismondi ;  none  was  more  eager  for  the  advance 
of  freedom  than  he  in  the  earlier  stage  of  his  remarkable 
intellectual  career.  In  1804,  he  published  at  Geneva  two 
volumes,  De  la  Richesse  Commerciale,  on  Principes  d' Econo- 
mic Politique,  which  are  expressly  stated  in  the  preface 
to  do  no  more  than  expound  what  Adam  Smith  had  dis- 
covered. Much  the  larger  part  of  the  book  is  given  to 
foreign  trade  and  the  subjects  that  go  with  it;  though  the 
wide  range  of  interest  which  Sismondi  showed  in  later 
life,  appeared  at  this  stage  in  the  attention  given  to  the 
other  topics.  Following  Adam  Smith,  he  points  out  that 
the  division  of  labor  brings  a  departure  from  the  simple 
conditions  of  primitive  industry.  Rich  and  poor  emerge ; 
"  comme  tout  homme  est  force  de  consommer  avant  de 
produire,  1'ouvrier  pauvre  ce  trouve  dans  la  dependance 
des  riches."  And  later  : 

Tuutes  les  fois  qu'on  met  a  1'ouvrage  un  ouvrier  productif,  et 
qu'on  lui  pave  un  salaire,  on  echange  le  present  centre  1'avenir,  les 
choses  qu'on  a  contre  celles  qu'on  aura,  1'aliment  et  le  vetement 
qu'on  fournit  a  1'ouvrier  contre  le  produit  prochain  de  son  travail. 
L'argent  n'entre  dans  ce  marche  que  comme  signe:  il  represente 
toujours  une  richesse  mobiliaire,  applicable  a  1'usage  et  a  la  consom- 


154 


WAGES   AND   CAPITAL. 


mation  de  1'homme,  c'est  cette  derniere  qui  est  le  vrai  capital 
circulant.  Le  numeraire  est  comme  une  assignation,  que  le  capi- 
taliste  donne  a  1'ouvrier,  sur  le  boulanger,  le  boucher,  et  le  tailleur, 
pour  qu'ils  lui  livrent  le  denree  consommable  qui  appartenoit  deja 
en  quelque  sorte  au  capitaliste,  puisqu'il  en  possedoit  le  signe.* 

The  laborer  and  capitalist  find  it  to  their  advantage 
to  make  the  bargain,  because  the  laborer  has  "  rien  enfin 
pour  se  nourrir  ou  se  vetir  "  ;  while  the  capitalist  wants  a 
profit.  Sismondi  notices  that  the  laborers  almost  always 
have  "  quelque  petit  fonds  accumule  "  with  which  to  sub- 
sist for  a  day  or  a  week,  until  their  wages  are  paid.  But 
this  fund  only  suffices  until  "  1'echange  de  1'objet  qu'ils 
ont  produit  soit  accompli  "  :  and  in  any  case  it  is  capital, 
the  laborers  being  in  so  far  both  laborers  and  capitalists. 

This  is  a  neat  and  compact  statement  of  what  Adam 
Smith  had  worked  out ;  in  some  respects  it  is  perhaps  an 
improvement  on  what  Adam  Smith  had  said.  There  is 
a  touch  of  originality,  perhaps  even  a  presentiment  of 
modern  ways  of  stating  the  situation,  in  the  description  of 
the  laborer  as  bargaining  away  the  future  for  the  present; 
and  the  function  of  money  in  regard  to  wages  could  not  be 
better  put.  On  the  other  hand,  Sismondi,  like  his  master, 
evidently  regards  the  period  during  which  advances  must 
be  made  to  the  laborers  as  that  only  which  elapses  until  a 
salable  product  is  made. 

Thenceforth,  in  the  brief  attention  he  gives  to  wages 
in  general,  Sismondi  speaks  of  them  as  determined  in  the 
first  instance  simply  by  the  quantity  of  capital  compared 
with  the  number  of  laborers  :  while  other  forces,  again, 
are  at  work  to  determine  them  in  the  long  run. 

Quelque  soit  le  nombre  des  ouvriers  proportionellement  au 
capital  qui  doit  les  nourrir,  ils  ne  pourront  se  contenter  longtems 
d'un  salaire  moindre  que  celui  qui  leur  est  absolument  necessaire 

*  De  la  Richesse  Commerciale,  vol.  i,  pp.  36,  53. 


THE  IMMEDIATE  FOLLOWERS  OF  ADAM  SMITH.    155 

pour'vivre:  la  misere  seroit  bientot  suivie  de  la  mortalite,  et  1'equi- 
libre  seroit  retabli  par  ce  contrepoids  aussi  redoutable  qu'efficace. 
Quelque  soil  d'autre  part  le  nombre  ou  la  valeur  des  capitaux 
destines  a  maintenir  le  travail,  ils  ne  pourront  jamais  etre  reduits  a 
ne  donner  aucun  profit  net.  .  .  .  Le  proprietaire  prefereroient  alors 
de  les  depenser  en  objets  de  luxe.* 

This  consideration  of  the  permanent  causes  which  de- 
termine wages  still  rests  mainly  on  Adam  Smith.  There 
is  again  an  original  turn  in  the  mention  of  a  minimum 
and  maximum  of  wages ;  which  bears  a  curious  similarity 
to  a  mode  of  stating  the  theory  of  wages  common  among 
German  writers  of  our  own  time.  But  the  treatment  is 
summary;  the  subject  enlisted  Sismondi's  interest  much 
less  than  free-trade,  internal  and  external,  and  the  French 
legislation  restricting  it. 

In  later  years,  Sismondi  recanted  many  of  the  doc- 
trines of  his  first  book.  In  the  Nouveaux  Principes  d}  Eco- 
nomie  Politique,  published  in  1819,  he  joined  the  reaction 
against  the  optimist  advocacy  of  the  wonder-working 
effects  of  unfettered  industry,  and  set  forth  the  doctrine 
of  over-production  and  "engorgement  des  marchees." 
His  anxiety  as  to  the  excess  to  which  free  competition 
could  lead  colored  his  conclusions  on  international  trade, 
corporations,  population,  poor-laws,  and  other  subjects. 
But  on  wages  he  did  not  find  occasion  to  modify  what  he 
had  said.  Indeed,  the  subject  is  treated  even  more  briefly 
than  in  the  earlier  book.  Capital  is  analyzed  as  resolv- 
able ultimately  into  food  :  it  is  rather  implied  than  explicit- 
ly stated  that  laborers  must  be  supported  out  of  capital. 
When  the  independent  treatment  of  wages  is  taken  in 
hand,  the  relation  of  capital  to  wages  is  not  mentioned. 
Sismondi  there  discusses  chiefly  the  need  of  high  wages  as 
a  means  of  putting  larger  purchasing  power  into  the  hands 

*  Ibid.,  vol.  i,  p.  63. 


156  WAGES    AND   CAPITAL. 

of  the  masses  and  so  supplying  a  market  for  the  threat- 
ened over-supply  of  goods.*  Indeed,  it  was  hardly  to  be 
expected  that  he  should  find  occasion  for  revising  what 
he  had  said  in  the  earlier  book  on  the  relation  of  wages 
and  capital ;  for  the  course  of  discussion  in  the  interval, 
while  it  had  elicited  differences  of  opinion  on  other  sub- 
jects, had  tended  to  strengthen  the  hold  of  Adam  Smith's 
views  on  this  one.  Practically  nothing  had  here  been 
done  to  advance  or  develop  the  results  reached  in  the 
Wealth  of  Nations. 

The  same  remark  may  be  made  of  the  treatment  of 
economic  theory  at  large  by  two  other  Frenchmen, — Say 
and  Ganilh.  Say's  famous  and  popular  Traite  d"Economie 
Politique,  published  in  1803,  was  in  the  main  an  exposition 
of  the  doctrines  of  Adam  Smith.  Capital,  according  to 
Say,  consists  of  tools,  materials,  and  subsistence.  Sub- 
sistence must  be  advanced  to  the  laborers,  and  must  be 
replaced  in  the  product :  "  he  [the  employer]  is  obliged 
continually  to  make  the  advances."  f  The  husbandman's 
capital  must  include,  besides  buildings,  tools,  and  cattle, 
"seed,  ground,  provisions,  fodder  for  cattle,  and  food  as 
well  as  money  for  his  laborers'  wages,  etc."  \  Here  we  find 
Adam  Smith's  farmer,  and  the  subsistence  for  the  laborers 
as  part  of  the  farmer's  capital,  without  further  analysis 
of  the  character  and  functions  of  this  form  of  capital. 
When  Say,  in  a  later  part  of  his  treatise,  discusses  wages 
independently,  the  subject  of  capital,  notwithstanding  the 
earlier  analysis  of  it,  does  not  reappear.**  Wages  are  said 
to  depend  on  the  laborer's  subsistence  as  modified  by  his 
habits.  They  are  adjusted  by  bargain  between  master 


*  Nonveaux  Principes,  Book  II,  ch.  iv,  on  the  return  from  capital, 
and  Book  IV,  ch.  v,  on  wages, 
f  Traitt,  Book  I,  ch.  iii. 
\  Ibid.,  Book  I,  ch.  x.  *  lh:.d  ,  Book  II,  ch.  vii,  §  iv. 


THE  IMMEDIATE  FOLLOWERS  OF  ADAM  SMITH. 


157 


and  man ;  and  Adam  Smith  is  followed  in  the  statement 
that  the  bargain  usually  works  to  the  advantage  of  the 
master.  But  the  part  which  the  master's  capital  plays  in 
the  bargain  is  not  considered :  Say  does  not  attend  to  the 
lead,  uncertain  as  it  was,  which  his  chief  had  given.  In 
truth,  Say's  books,  wide  as  was  their  circulation  and  influ- 
ence, were  thin  in  intellectual  quality,  and  could  hardly  be 
expected  to  reflect  more  than  the  current  ideas  of  the  time. 
Ganilh's  Inquiry  into  the  Various  Systems  of  Political 
Economy  is  in  many  ways  not  unlike  Say's  Traite ';  it  is 
neat  and  lively,  and  shows  the  skill  of  the  French  in  ex- 
position. An  eclectic  performance,  it  yet  follows  in  the 
main  Adam  Smith,  differing  with  him  only  on  a  few  topics, 
like  the  distinction  between  productive  and  unproductive 
labor  and  the  doctrine  of  labor  as  a  measure  of  value, 
on  which  Say  and  Lauderdale  had  undertaken  to  correct 
their  acknowledged  leader.  On  capital,  Ganilh  para- 
phrases Adam  Smith  without  effort  at  independence. 
Capital  is  an  accumulation  of  the  produce  of  labor,  in- 
cluding not  only  machines  and  instruments,  but  "  the  ad- 
vances and  raw  materials  necessary  to  all  kinds  of  labor 
.  .  .  and  produce  kept  in  store  for  present,  future,  and 
distant  consumption."  But  of  capital  in  its  relation  to 
wages  Ganilh  has  nothing  to  say.  In  the  chapter  on 
Wages,*  the  fluctuation  of  wages  with  the  price  of  pro- 
visions receive  attention  :  but  the  proximate  source  of  the 
demand  for  labor  is  not  treated  as  it  was  by  Adam  Smith. 
The  demand  for  labor  varies  with  the  progressive,  sta- 
tionary, or  retrograde  state  of  national  wealth.  This  is 
an  echo  of  the  doctrine  of  the  Wealth  of  Nations  that 
wages  are  high  only  in  advancing  communities  :  it  does 
not  touch  the  detailed  analysis  of  the  demand  for  labor 
with  which  Adam  Smith  had  begun.  Neither  Ganilh  nor 

*  Book  II,  ch.  vii. 


158  WAGES  AND   CAPITAL. 

Say  touched  the  really  intricate  and  difficult  parts  of  their 
subject. 

Among  English  writers  of  this  period,  there  was  even 
less  of  direct  discussion  than  among  the  Frenchmen  of 
the  relation  of  capital  to  wages.  In  England,  as  else- 
where, Adam  Smith's  attacks  on  the  mercantile  system 
chiefly  attracted  attention.  What  he  said  of  capital  in 
general,  abstruse  as  it  was,  and  far  removed  from  the 
pressing  problems  of  the  day,  aroused  little  discussion  : 
what  he  said  of  capital  and  wages,  apparently  none  at  all. 

Lord  Lauderdale,  to  mention  one  of  the  ablest  and 
most  independent  of  Adam  Smith's  immediate  successors, 
in  his  Inquiry,  protested  against  several  of  Adam  Smith's 
doctrines,  notably  those  on  labor  as  a  measure  of  value, 
and  "  parsimony  "  as  the  mainspring  of  public  prosperity. 
Lauderdale  was  a  keen  and  able  thinker,  and  his  correc- 
tions of  some  of  Adam  Smith's  doctrines  deserved  more 
attention  than  the  later  classic  school  gave  them.  But  on 
the  subject  of  capital  and  wages  he  made  no  advance,  and 
indeed  did  not  fairly  attend  to  what  Adam  Smith  had 
said.  Capital  he  regarded  as  consisting  only  of  tools  and 
machinery,  and  (perhaps)  materials ;  and  these  were  treated 
as  simply  "  supplanting  "  labor.  Lauderdale  failed  to  see 
that  tools  do  not  supplant  labor,  and  that  they  are  simply 
a  different  mode  of  applying  labor.  But  this  view  of  capi- 
tal had  no  bearing  on  the  relations  of  labor  and  capital; 
in  fact,  it  tended  to  prevent  a  consideration  of  that  rela- 
tion. Commodities  advanced  to  laborers  were  apparently 
not  considered  to  be  capital  by  Lauderdale.  This  is  cer- 
tainly a  tenable  view;  but  it  does  not  obviate  the  need  of 
considering  the  problem  how  the  finished  or  nearly  fin- 
ished commodities,  which  are  not  dubbed  capital,  get  into 
laborers'  hands.  To  that  problem  Lauderdale  gave  no 
attention.  His  Inquiry,  indeed,  makes  no  pretence  at  cov- 
ering the  whole  ground.  It  is  a  series  of  detached  essays 


THE  IMMEDIATE  FOLLOWERS  OF  ADAM  SMITH. 


I  $9 


on  certain  points  on  which  the  author  had  thought  for 
himself  and  had  reached  conclusions  different  from  Adam 
Smith's.  Like  others  of  his  time,  he  was  concerned  with 
questions  of  production  rather  than  with  those  of  distribu- 
tion. His  writings  are  of  interest  to  the  present  subject 
because  of  the  evidence  they  give  that  Adam  Smith's  dis- 
cussion of  it,  when  not  followed  in  express  terms,  aroused 
no  adverse  comment. 

Malthus  is  the  most  important  figure  in  the  interval 
between  Adam  Smith  and  Ricardo,  The  Essay  on  Popula- 
tion far  surpasses  any  other  economic  publication  of  that 
time,  both  in  the  attention  which  it  aroused  with  the  gen- 
eral public,  and  in  the  influence  it  exercised  on  the  subse- 
quent course  of  economic  speculation.  Directly,  it  said 
little  or  nothing  on  capital,  or  the  relations  of  capital  and 
wages;  indirectly,  it  had  a  very  marked  effect  on  the  dis- 
cussion of  this  part  of  economic  theory. 

Directly,  Malthus  in  the  Essay  on  Population  touched 
very  lightly  on  general  economic  questions.  Indeed,  he 
was  then  very  slenderly  equipped  for  doing  so.  He  had 
drifted,  as  it  were,  into  the  discussion  of  economic  topics, 
publishing  the  first  edition  of  the  Essay  (1798)  as  a  pam- 
phlet against  Godwin  and  Condorcet;  and  the  pamphlet- 
eering spirit  did  not  entirely  disappear  even  when  he 
enlarged  it,  with  the  second  edition  (1803),  into  the  for- 
midable volume  which  established  his  fame.  Malthus  had 
read  Adam  Smith,  and  even  in  the  first  edition  of  the  Essay 
made  reference  to  Adam  Smith's  discussion  of  wages; 
but  it  was  not  until  a  later  period  that  the  questions  of 
wages  and  profits,  and  the  theory  of  distribution  proper, 
engaged  his  attention.  Of  his  contribution  to  these  ques- 
tions in  his  later  years,  when  he  had  become  a  professor 
of  political  economy,  and  had  begun  to  write  more  on  eco- 
nomic subjects  at  large,  something  will  be  said  when  the 
development  of  thought  after  the  time  of  Ricardo  comes 

12 


Igo  WAGES   AND   CAPITAL. 

to  be  .taken  up.  For  the  present,  it  will  suffice  to  note 
what  Malthus  had  to  say  when  his  thinking  still  turned 
almost  exclusively  on  the  question  of  population.  The 
only  passage  on  the  general  theory  of  wages  is  in  the  six- 
teenth chapter  of  the  first  edition  of  the  Essay, — a  chapter 
which,  though  revised  and  rewritten  in  later  editions,  re- 
mained unchanged  so  far  as  the  gist  of  the  reasoning 
went.*  Here  Malthus  attacked,  with  a  diffidence  that  was 
quite  unaffected,!  the  doctrine  which  he  attributed  to 
Adam  Smith,  that  the  demand  for  labor  increases  pari 
passu  with  the  growth  of  the  total  wealth,  or  the  combined 
stock  and  revenue  of  society.  Malthus  maintained  that 
the  demand  for  labor  came  from  "  the  real  funds  destined 
for  the  maintenance  of  labor," — a  phrase  evidently  derived 
from  Adam  Smith,  and  often  repeated  by  Malthus.  These 
real  funds,  in  Malthus's  opinion,  must  be  mainly  food; 
and  so  he  brings  the  emphasis  to  the  point  about  which 
the  whole  Essay  centres, — the  possibilities  and  probabili- 
ties of  the  relative  growth  of  population  and  of  food.J 


*  This  chapter  became  chapter  VII  of  Book  III  in  the  second  edition 
of  1803,  and  is  chapter  XIII  of  Book  III  in  the  last  edition.  Its  caption 
is :  "  Of  Increasing  Wealth  as  it  affects  the  Condition  of  the  Poor." 

f  "  I  can  not  avoid  venturing  a  few  remarks  on  a  part  of  Dr.  Adam 
Smith's  Wealtli  of  Nations ;  speaking  at  the  same  time  with  that  diffi- 
dence, which  I  ought  certainly  to  feel,  in  differing  from  a  person  so  justly 
celebrated  in  the  political  world."  Essay  on  Population,  first  edition, 
p.  302.  The  diffidence  seems  to  have  been  no  longer  felt  when  Malthus 
reached  his  second  edition  ;  for  these  apologetic  sentences  do  not  appear 
in  the  volume  of  1803. 

\  "  Little  or  no  doubt  can  exist  that  the  comforts  of  the  labouring  poor 
depend  upon  the  increase  of  the  funds  destined  for  the  maintenance  of 
labour  ;  and  will  be  very  exactly  in  proportion  to  the  rapidity  of  this  in- 
crease. The  demand  for  labour  which  such  increase  would  occasion,  by 
creating  a  competition  in  the  market,  must  necessarily  increase  the  value 
of  labour  ;  and,  till  the  additional  number  of  hands  required  was  secured, 
the  increased  funds  would  be  distributed  to  the  same  number  of  persons 


THE  IMMEDIATE  FOLLOWERS  OF  ADAM  SMITH,     ifa 

Malthus  was  on  the  right  track,  as  Adam  Smith  had  been 
before  him,  in  saying  that  the  real  funds  which  constituted 
the  demand  for  labor  were  the  consumable  commodities 
which  constituted  real  wages.  But  he  hardly  got  as  far 
as  Adam  Smith  in  analyzing  these  funds.  He  simply  told 
the  world  that  mankind,  physiologically  considered,  had 
the  potentiality  of  multiplying  much  faster  than  the  most 
important  element  in  real  wages — food — could  probably 
increase.  Other  constituent  parts  of  real  wages,  as  manu- 
factured goods,  might  be  increased  in  quantity  with  com- 
parative ease,  and  wealth  in  this  form  might  advance  rap- 
idly ;  but  such  an  increase  would  not  mean  a  greater  supply 
of  food,  and  would  not  enlarge  the  real  funds  for  sup- 
porting and  maintaining  labor.  This  was  the  only  point 
of  view  from  which  Malthus  approached  his  predecessor's 
doctrine  of  wages.  Evidently  it  does  not  touch  in  any 
way  the  theory  of  capital,  or  of  capital  in  relation  to 
wages,  or  of  the  connection  between  the  acts  of  the  capi- 


as before  the  increase,  and  therefore  every  labourer  would  live  compara- 
tively at  his  ease.  But  perhaps  Dr.  Smith  errs  in  representing  every  in- 
crease of  the  revenue  or  stock  of  a  society  as  an  increase  of  these  funds. 
Such  surplus  stock  or  revenue  will,  indeed,  always  be  considered  by  the 
individual  possessing  it,  as  an  additional  fund  from  which  he  may  main- 
tain more  labour  ;  but  it  will  not  be  a  real  and  effectual  fund  for  the 
maintenance  of  an  additional  number  of  labourers,  unless  the  whole,  or  at 
least  a  great  part  of  this  increase  of  the  stock  or  revenue  of  the  society, 
be  convertible  into  a  proportional  quantity  of  provisions  ;  and  it  will  not 
be  so  convertible,  where  the  case  has  arisen  merely  from  the  produce  of 
labour,  and  not  from  the  produce  of  land.  A  distinction  will  in  this  case 
occur,  between  the  number  of  hands  which  the  stock  of  tha  society  could 
employ,  and  the  number  which  its  territory  can  maintain."  Essay  on 
Population,  first  edition,  pp.  305,  306. 

In  the  second  edition,  this  passage  is  retained  with  no  substantial 
change  ;  but  Malthus  now  was  more  sure  of  his  ground,  and  stated 
roundly  that  "  the  error  of  Dr.  Smith  lies  in  representing  "  and  so  on. 
Essay,  second  edition,  p.  421, 


1 62  WAGES   AND   CAPITAL. 

talist  employer  in  hiring  laborers  and  the  mode  in  which 
the  laborers'  real  income  is  determined.  As  we  shall  pres- 
ently see,  Malthus  hardly  got  any  further  than  this  even 
in  his  later  writings,  directed  though  these  were  to  a  wider 
field  than  the  Essay  on  Population.  At  all  events,  nothing 
that  he  said  in  this  earlier  period  made  any  direct  advance 
in  the  discussion. 

Indirectly,  however,  the  Essay  on  Population  had  a  very 
great  influence  on  that  discussion.  Malthus  fastened  at- 
tention on  the  standard  of  living  as  the  determining  cause 
of  wages.  Population  tended,  within  the  limits  set  by  the 
standard  of  living,  to  press  on  subsistence;  changes  in 
wages,  unless  the  result  of  a  changed  standard,  were  un- 
important. However  explicitly  Malthus  admitted  the  pos- 
sible effect  of  moral  restraint  in  checking  the  pressure  of 
population,  and  however  eloquently  he  preached  the  vir- 
tue of  such  restraint,  he  retained  throughout  a  conviction 
of  the  strong  probability  that  every  increase  in  food  would 
bring  a  corresponding  increase  in  numbers,  and  that 
wages,  in  terms  of  the  habitual  food  of  the  laborers,  would 
remain  at  one  dead  level.  When,  twenty  years  later, 
Senior,  in  his  correspondence  with  Malthus,  maintained 
that  as  an  historical  fact  food  had  increased  faster  than 
population,  Malthus,  admitting  that  this  might  be  true, 
pointed  out  that  his  theory  would  not  thereby  be  im- 
pugned.* He  was  thus  ready  to  say,  when  squarely  brought 
to  the  issue,  that  the  simple  tendency  to  pressure  was  the 
essence  of  his  teaching.  Vet  the  very  need  of  such  a 
question  as  Senior's  showed  how  firmly  he  had  impressed 
on  his  contemporaries  the  belief  that  the  tendency  to 
pressure  was  strong,  and  so  little  likely  to  be  mitigated  or 
counteracted  as  to  leave  it  practically  true  that  wages 

*  See  the  correspondence  between  Senior  and   Malthus,  appended  to 
Senior's  TT.UO  Lccttircs  on  Population  (London,  1829). 


THE  IMMEDIATE  FOLLOWERS  OF  ADAM  SMITH.     ^3 

depended  on  a  fixed  low  standard  of  living,  and  that  an 
increase  in  subsistence  meant  simply  an  increase  in  num- 
bers. The  consequence'was  that  the  inquiry  which  Adam 
Smith  had  begun,  as  to  the  immediate  causes  determining 
wages,  seemed  superfluous.  It  was  sufficient  that  wages 
were  regulated  by  the  "principle  of  population."  The 
effect  of  Malthus's  teaching  in  the  Essay  was  to  fix  atten- 
tion on  the  ultimate  causes  which  determined  wages,  and 
to  divert  attention  from  the  proximate  causes  and  the 
exact  mode  of  their  operation. 

The  result  of  this  chapter  is  thus  mainly  negative.  No 
writer  of  the  period  between  Adam  Smith  and  Ricardo  got 
beyond  the  point  reached  by  the  former  in  his  analysis  of 
capital  at  large,  and  of  the  place  of  capital  in  the  pay- 
ment of  wages.  Anything  new  that  may  appear  on  this 
topic  in  the  period  that  begins  with  Ricardo,  may  there- 
fore be  treated  as  a  direct  advance  from  the  Wealth  of 
Nations;  anything  old  and  familiar  as  derived  from  that 
source.  It  will  be  seen  that  the  additions  were,  for  a  long 
series  of  years,  slight  in  substance,  and  not  even  consid- 
erable in  the  mode  of  statement.  The  influence  of  Adam 
Smith,  on  his  later  followers  as  well  as  on  those  closer  to 
his  own  time,  was  here  greater  and  more  lasting  than  on 
the  treatment  of  almost  any  other  parts  of  the  theory  of 
distribution. 


CHAPTER   IX. 

RICARDO. 

NEXT  in  order,  for  the  development  of  the  wages  fund 
doctrine,  as  for  economic  theory  at  large,  comes  Ricardo. 
In  regard  to  the  direct  relation  of  capital  to  wages,  he  re- 
flected faithfully  the  views  of  his  own  generation;  while 
the  mode  in  which  he  stated  that  relation,  and  connected 
it  with  other  parts  of  economic  theory,  served  to  impress 
these  views  strongly  on  the  generation  that  followed. 

Ricardo  was  a  brief  writer,  and  sometimes  an  awkward 
one.  Moreover,  he  was  concerned,  especially  in  his  writ- 
ings on  value  and  distribution,  with  permanent  causes 
and  permanent  results.  He  was  convinced  of  the  funda- 
mental validity  of  certain  premises,  such  as  the  effective 
working  of  competition,  the  equality  of  profits,  the  adjust- 
ment of  money  wages  to  the  price  of  food,  the  law  of  di- 
minishing returns  from  land  ;  and  the  bent  of  his  mind 
was  to  follow  out  these  premises  to  their  conclusions  by 
quasi-mathematical  reasoning.  Ricardo  was  perfectly 
conscious — when  he  stopped  to  think  about  it — that  his 
conclusions  could  be  true  only  in  the  rough,  in  the  long 
run,  "  hypothetical!}7  "  ;  but  he  was  so  intent  on  working 
them  out  that  he  usually  spoke  and  reasoned  as  if  they 
were  absolutely  and  unqualifiedly  true.  In  any  case,  it 
was  the  conclusions  reached  in  this  manner  as  to  eventual 
results,  that  he  habitually  looked  to  ;  saying  little  or 

104 


RICARDO. 


I65 


nothing  of  the  phenomena  which,  rightly  or  wrongly,  he 
regarded  as  temporary  and  comparatively  unimportant. 

Another  cause  served  to  add  to  Ricardo's  habitual 
brevity  of  statement,  so  far  as  the  immediate  relations  of 
capital  to  wages  were  concerned.  Neither  Ricardo  nor  his 
contemporaries  were  much  concerned  with  the  questions 
of  distribution  as  they  appeal  to  us.  Wages,  profits,  rent, 
did  not  interest  them  from  the  social  point  of  view,  or 
because  great  inequalities  in  the  means  of  enjoyment 
might  be  explained,  and  either  justified  or  not  justified, 
by  analyzing  them.  They  were  interested  mainly  in  the 
ways  and  means  of  increasing  the  production  of  wealth. 
Ricardo  himself,  as  he  went  further  in  economic  study, 
gave  more  and  more  attention  to  questions  of  distribu- 
tion, which  gradually  assumed  greater  theoretical  and 
practical  importance  in  his  mind.*  But  in  the  main,  they 
did  not  strongly  appeal  to  him  ;  they  were  attractive  large- 
ly because  they  presented  complex  problems  for  logical 
solution.  It  was  natural,  therefore,  that  he  should  con- 
cern himself  little  with  the  causes  which  might  directly 
determine  the  welfare  of  the  laborers. 

Hence  we  find  in  Ricardo's  writings  no  such  detailed 
discussion  of  the  relation  of  capital  to  wages,  as  we  find 
of  value,  rent,  changes  in  wages  with  the  price  of  food, 
the  causes  and  effects  of  international  trade.  The  ques- 
tions involved  in  the  wages  fund  doctrine,  bearing  as  they 
do  on  the  phenomena  of  the  moment,  are  precisely  such  as 
Ricardo  was  in  the  habit  of  passing  by.  We  must  make 
out  his  views  partly  from  brief  statements  and  incidental 
remarks,  still  more  from  suppositions  and  premises  which, 
though  tacitly  assumed  rather  than  expressly  stated,  are 


*  See  the  instructive  essay  on  The  Interpretation  of  Ricardo,  by  Pro- 
fessor S.  N.  Patten,  in  the  Quarterly  Journal  of  Economics,  April,  1893 
(vol.  vii,  p.  322). 


1 66  WAGES   AND  CAPITAL. 

yet  of  the  essence  of  his  reasoning.  While  his  opinions 
were  thus  briefly  stated,  they  were  none  the  less  clear  and 
explicit.  Precision  and  accuracy  of  thought  are  in  every- 
thing that  he  wrote;  and  his  chief  contribution  to  the 
wages  fund  doctrine  was  in  the  precision  with  which  he 
stated  it,  and  in  the  example  of  unqualified  statement 
which  he  set  for  his  successors. 

The  first  thing  to  be  noticed  in  Ricardo's  treatment  of 
our  subject  is  the  simple  assumption  that  wages  as  a  mat- 
ter of  course  are  paid  from  capital.  Why  this  should  be, 
he  never  thought  it  necessary  to  explain.  Nothing  more 
clearly  shows  the  hold  which  Adam  Smith  had  on  the 
economists  who  followed  him,  than  their  unquestioning 
acceptance  of  this  cardinal  proposition.  A  writer  having 
the  wider  historical  interests  of  Sismondi  might  indeed 
stop  to  explain  why  wages  must  come  from  capital ;  but 
most  of  Adam  Smith's  successors  simply  accepted  his  doc- 
trine.* Ricardo  treated  it  as  he  did  many  other  conclu- 
sions of  Adam  Smith's  :  accepted  it  as  a  thing  settled, 
and  needing  no  further  discussion.  All  his  reasoning 
shows  that  he  perceived  clearly  the  fundamental  fact  on 
which  it  rested, — the  fact  that  the  operations  of  production 
are  spread  over  a  considerable  period  of  time.  Much  of 
his  reasoning,  indeed,  rests  squarely  on  this  fact.  But  its 
importance  as  the  foundation  of  the  doctrine  of  the  pay- 
ment of  wages  from  capital,  he  never  mentioned,  and 
probably  did  not  fairly  realize. 

Next  it  may  be  noticed  how  the  problem  is  simplified 
at  Ricardo's  hands.  The  laborers  whom  Adam  Smith  had 
described  as  paid  out  of  "revenue,"  drop  entirely  out  of 
his  ken.  Only  laborers  who  are  hired  by  capitalists  aim- 


*  No  doubt  the  great  growth  of  the  capitalist  system  between  1776 
and  1815  had  much  to  do  with  the  exclusive  attention  which  the  later 
writers  give  to  laborers  hired  by  capitalists. 


RICARDO. 


167 


ing  to  make  a  profit  are  considered.  This  simplification 
of  the  problem  may  be  due  in  part  to  changing  conditions 
in  society, — the  more  complete  disappearance  of  the  feudal 
practice  of  large  arrays  of  retainers,  and  the  increase  in 
more  modern  forms  of  luxury.  Chiefly  it  is  due  to  Ricar- 
do's  mental  habits  :  his  tendency  to  cull  out  the  central 
problem,  and  consider  that  only,  and  in  its  fundamental 
aspects  only.  The  laborer  producing  commodities  under 
the  guidance  of  a  capitalist  middleman  *is  the  typical 
figure;  the  one,  too,  whose  case  gives  opportunity  for  the 
intricate  figuring  and  reasoning  in  which  Ricardo  was  in 
his  element.  Hence  not  only  retainers,  but  independent 
workmen  producing  commodities  for  direct  sale,  disap- 
pear. Adam  Smith  had  noted  that  laborers  are  not  neces- 
sarily hired  by  masters,  but  may  sometimes  work  inde- 
pendently ;  Sismondi  too  had  remarked  that  such  a 
situation  would  present  peculiarities.  Ricardo  never  men- 
tions the  case.  He  considers  only  the  laborers  hired  by 
capitalists. 

The  industrial  conditions  under  which  he  wrote  un- 
doubtedly contributed  very  greatly  to  this  limitation  of 
Ricardo's  treatment.  In  England,  during  his  time  and 
since  his  time,  the  bulk  of  the  laboring  population  has 
been  divorced  from  the  capital  and  the  land.  Perhaps  a 
writer  of  academic  training  and  of  larger  historical  attain- 
ments might  have  been  led  to  consider  that  this  was  not 
a  necessary  or  universal  state  of  things  ;  though  the  pro- 
cedure of  Ricardo's  successors  hardly  encourages  the  be- 
lief that  a  wide  academic  culture  would  have  prevented 
the  narrow  point  of  view.  But  certainly  in  a  country 
where  many  laborers  had  some  land  and  some  capital,  it 
would  not  have  been  so  easy  to  treat  the  agricultural 
laborer,  who  was  the  type  of  all  labor  in  so  many  of 
Ricardo's  illustrations,  as  necessarily  hired  by  a  capitalist 
employer.  The  unfortunate  position  of  Hodge  caused 


j68  WAGES   AND   CAPITAL. 

English  economists  with  hardly  an  exception  to  do  aS 
Ricardo  did :  accept  as  a  matter  of  course  the  dependence 
of  all  laborers  on  capital  owned  by  others. 

The  problem,  thus  simplified  and  reduced  to  its  barest 
elements,  was  naturally  answered  in  more  precise  and  un- 
qualified terms.  Not  only,  as  Adam  Smith  put  it,  are 
wages  paid  out  of  capital,  and  determined  by  a  bargain  in 
which  the  demand  for  labor  comes  from  employers'  capi- 
tal :  but  the  amount  of  that  capital,  compared  with  the 
number  of  the  laborers,  fixes  wages  definitely.  It  is  one 
thing  to  say  that  wages  are  paid  out  of  capital  ;  another 
thing,  to  say  that  the  amount  of  capital  determines  wages 
once  for  all.  Ricardo's  habit  of  close  calculation  and  un- 
flinching reasoning  might  be  expected  to  bring  forth  a 
more  sharply  defined  statement  than  Adam  Smith's.  In 
fact,  he  made  wages  dependent  directly  on  the  amount  of 
capital,  and  put  forth  a  wages  fund  doctrine  as  unquali- 
fiedly as  any  of  the  later  writers  with  whom  that  doctrine 
is  usually  associated. 

We  may  proceed  now  to  consider  more  in  detail 
Ricardo's  conception  of  capital,  and  of  the  manner  in 
which  wages  depend  on  capital.  "  Capital,"  he  says  in  the 
chapter  on  Wages  in  the  Principles  of  Political  Economy, 
"is  that  part  of  the  wealth  of  a  country  which  is  em- 
ployed in  production,  and  consists  of  food,  clothing,  tools, 
raw  material,  machinery,  etc.,  necessary  to  give  effect 
to  labor."  The  last  clause  was  the  important  one  in 
Ricardo's  mind.  Capital  was  needed  to  give  effect  to 
labor  :  and  the  essential  form  in  which  it  gave  effect  to 
labor  was  by  supporting  it.  Capital  was  ultimately  re- 
solvable into  food,  or  into  advances  to  labor. 

This  proposition  became,  consciously  and  uncon- 
sciously, a  corner  stone  of  the  Ricardian  structure;  it  un- 
derlies all  the  reasoning  of  Ricardo  and  of  his  followers 
on  distribution.  It  can  be  applied,  however,  in  very  dif- 


RICARDO. 


169 


ferent  ways.  It  can  be  easily  translated  into  the  state- 
ment that  wages  at  any  time  depend  simply  on  the  pro- 
portion of  the  total  capital  of  the  community  to  the  total 
number  of  laborers  of  the  community.  This  simple  propo- 
sition we  shall  find  commonly  laid  down  by  the  later  writ- 
ers of  the  classic  school  ;  having  its  roots  partly  in  Adam 
Smith's  first  discussion  of  the  subject,  but  quite  as  much 
in  Ricardo's  identification  of  capital  with  advances  to 
laborers.  Ricardo  himself,  however,  used  it  chiefly  in 
other  ways  and  for  other  purposes. 

The  mode  in  which  he  drew  conclusions  directly  from 
the  analysis  of  all  capital  into  advances  to  labor,  appears 
most  clearly  in  the  third,  fourth,  and  fifth  sections  of  the 
opening  chapter  of  the  Principles.  The  chapter  deals  with 
value;  and  in  the  sections  mentioned  he  considers  how 
far  the  employment  of  capital  affects  his  fundamental 
doctrine  that  value  depends  solely  on  the  quantity  of 
labor  necessary  to  obtain  a  commodity.  Under  the 
simplest  conditions,  or,  as  Adam  Smith  and  Ricardo  put 
it,  "  in  that  early  and  rude  state  of  society,  which  precedes 
both  the  accumulation  of  stock  and  the  appropriation  of 
land  "  it  is  clear  that,  if  "  competition  operates  without 
restraint,"  *  commodities  will  exchange  in  proportion  to 
the  labor  necessary  for  producing  them.  The  accumula- 
tion and  employment  of  capital  do  not  change  the  situa- 
tion ;  because  they  simply  bring  a  different  mode  of  ap- 
plying labor  to  production. 

If  we  look  to  a  state  of  society  in  which  greater  improvements 
have  been  made,  and  in  which  arts  and  commerce  flourish,  we  shall 
still  find  that  commodities  vary  in  value  conformably  with  this 
principle :  in  estimating  the  exchangeable  value  of  stockings,  for 
example,  we  shall  find  that  their  value,  comparatively  with  other 
things,  depends  on  the  total  quantity  of  labour  necessary  to  manu- 

*  This  supposition  Ricardo  made  in  terms.      Works,  p.  10. 


WAGES   AND   CAPITAL. 

facture  them  and  to  bring  them  to  market.  First,  there  is  the 
labour  necessary  to  cultivate  the  land  on  which  the  raw  cotton  is 
grown  ;  secondly,  the  labour  of  conveying  the  cotton  to  the  country 
where  it  is  to  be  manufactured,  which  includes  a  portion  of  the 
labour  bestowed  in  building  the  ship  in  which  it  is  conveyed,  and 
which  is  charged  in  the  freight  of  the  goods  ;  thirdly,  the  labour  of 
the  spinner  and  weaver  ;  fourthly,  a  portion  of  the  labour  of  the 
engineer,  smith,  and  carpenter,  who  erected  the  buildings,  by  the 
help  of  which  they  were  made  ;  fifthly,  the  labour  of  the  retail 
dealer,  and  of  many  others,  whom  it  is  unnecessary  further  to  par- 
ticularize.* 

The  modern  reader  would  expect  to  find  this  descrip- 
tion of  the  successive  division  of  labor,  in  a  discussion  of 
the  sequence  of  production  or  of  the  functions  of  capital. 
But  Ricardo  mentions  it  and  uses  it  for  a  different  pur- 
pose. He  proceeds  to  point  out  how  his  principle  that 
value  depends  on  quantity  of  labor  bestowed,  is  modified 
according  to  the  mode  in  which  capital  is  advanced  to 
laborers  ;  applying  the  reasoning  to  a  consideration  of 
value  in  a  community  where  all  laborers  are  employed  by 
capitalists.  We  are  not  concerned  with  the  details  of  the 
proof  that  value,  in  such  a  community,  will  not  depend  on 
quantity  of  labor  alone,  and  that  a  general  rise  or  fall  in 
wages  will  affect  the  value  of  commodities  made  with  the 
aid  of  much  fixed  capital,  compared  with  commodities 
made  by  the  more  direct  application  of  labor, — a  proposi- 
tion which  both  Ricardo  and  his  followers  set  forth  at 
wearisome  length.  The  point  essential  for  the  present 
subject  is  that  the  reasoning  rests  simply  on  the  assump- 
tion that  capital  means  nothing  more  than  advances  to 
labor.  In  general,  if  more  labor  of  one  sort  or  another  is 
needed  to  make  a  given  commodity,  more  capital  needs  to 
be  advanced  in  the  same  proportion  ;  the  profit  to  capital 

*  Ricardo,  IVorks,  p.  17. 


RICARDO. 


171 


is  in  proportion  to  the  advances  to  labor,  or  to  the 
quantity  of  labor  ;  hence  the  fact  of  production  under  the 
lead  of  capitalists,  and  the  appearance  of  profit,  do  not 
per  se  modify  the  principle  that  value  depends  on  labor 
bestowed.  "  Fixed  capital,"  in  fact,  is  only  "  accumulated 
labour."  * 

We  have  only  another  phase  of  the  same  line  of 
thought  when,  in  the  familiar  and  much-abused  proposi- 
tion, profits  are  said  to  depend  on  wages.  Profits  are  high 
when  wages  are  low,  and  are  low  when  wages  are  high, 
simply  because  the  investment  of  capital  is  ultimately  re- 
solvable into  advances  to  laborers.  All  the  advances  of 
the  capitalists  as  a  body  consist  at  bottom  of  payments 
to  laborers ;  what  capitalists  get  back  in  return  for  their 
advances,  is  what  the  laborers  produce ;  profits  at  large 
depend  on  the  relation  between  what  is  turned  over  to 
laborers  and  what  is  produced  by  them.  Perhaps  Ricar- 
do's  meaning  is  best  expressed  (Ricardo  himself  did  not 
so  put  it,  but  Senior  and  other  writers  of  later  date  did  so 
for  him)  by  saying  that  profits  depend  on  the  proportion 
between  wages  and  product ;  profits  being  high  or  low, 
according  as  the  proportion  of  general  wages  to  general 
output  was  small  or  large.  However  stated,  there  is  a 
solid  and  unquestionable  basis  to  the  proposition  :  it  brings 
into  bold  relief  the  essential  fact  in  capitalist  operations 
and  the  essential  cause  of  profits  and  of  interest.  In  so 
far,  economic  science  owes  a  permanent  debt  to  Ricardo, 
however  his  own  deductions  may  need  correction,  and 
however  much  his  theorem  may  have  been  twisted  by  later 
interpreters.  Ricardo  deduced  conclusions  from  it  on  the 
assumption  that  wages  fluctuated  closely  with  the  price  of 
food,  and  that  the  price  of  food  rose  regularly,  under  the 
law  of  diminishing  returns,  with  every  addition  to  the  sup- 


*  Works,  p.  23,  where  these  two  phrases  are  used  as  equivalents. 


jj2  WAGES   AND    CAPITAL. 

ply;  assumptions  to  which  the  historical  facts  correspond 
so  little  that  many  of  his  conclusions  have,  even  in  the 
long  run,  but  a  very  limited  application.  On  the  other 
hand,  the  proposition  that  all  capital  stands  for  advances 
to  laborers,  when  stated  in  the  questionable  phrase  that 
capital  is  "  accumulated  labor,"  has  been  twisted  by  the 
optimists  into  a  defence  of  profit,  and  so  has  been,  not  un- 
fairly, the  occasion  for  plentiful  ridicule  by  the  socialists. 
But  the  essential  truth  in  it  remains  incontestable.  With- 
out it  the  phenomena  of  capital  and  interest  can  not  be 
understood. 

This,  however,  is  not  the  wages  fund  doctrine,  nor  is 
it  of  service  in  answering  the  question  which  that  doctrine 
tried  to  answer:  namely,  what  are  the  proximate  causes 
determining  wages  at  any  one  time.  Its  bearing  is  on 
profits,  not  on  wages.  The  total  advances  to  labor,  repre- 
sented by  the  total  capital  of  any  one  time,  have  been 
spread  over  a  long  period.  Some  advances  were  made 
years  ago,  and  are  represented  by  tools  and  machinery 
still  in  use.  Some  were  made  within  the  year,  and  are 
represented  chiefly  by  wheat  on  the  fields.  When  all  the 
tools  are  gone,  and  all  the  wheat  has  become  bread,  it 
will  appear  how  much  the  laborers  have  produced  during 
the  whole  prolonged  period,  in  comparison  with  the  total 
which  has  been  turned  over  to  them.  But  the  demand  for 
labor,  in  any  given  season,  comes  only  from  the  fresh  ad- 
vances then  made.  For  the  question  of  "  market  "  wages, 
it  is  necessary  to  cull  out  from  total  capital  that  part 
which  is  effective  at  the  moment  in  rewarding  laborers. 

To  this  special  part  of  the  subject,  Ricardo  never 
stopped  to  give  much  attention.  His  phraseology  is  loose 
and  uncertain.  Frequently,  he  used  language  which  would 
imply  that  market  wages  depended  simply  on  the  propor- 
tion of  laborers  to  capital  at  large,  so  giving  color  to  the 
opinion,  not  seldom  maintained  since  his  time,  that  the 


RICARDO. 


173 


wages  fund  doctrine  is  but  another  version  of  the  doctrine 
that  wages  and  profits  vary  inversely.  Thus, — to  cite  but 
one  passage  from  many  of  the  same  tenor, — he  says,  in  so 
many  words,  that  "  profits  might  increase,  because,  the 
population  increasing  at  a  more  rapid  rate  than  capital, 
wages  might  fall."  Yet  the  remainder  of  the  same  sen- 
tence shows  that  he  conceived  of  the  demand  for  labor  at 
the  moment  as  identical  not  with  total  capital,  but  with  a 
part  of  capital  :  "instead  of  the  value  of  100  quarters  of 
wheat  being  necessary  for  the  circulating  capital,  90  only 
[out  of  a  total  capital  of  190]  might  be  required."  *  Here 
we  have  the  phrase  "  circulating  capital,"  used  to  desig- 
nate that  part  of  capital  which  serves  directly  to  yield 
wages.  Ricardo  rightly  declared  the  distinction  between 
fixed  and  circulating  capital  to  be  "  not  essential,  and  in 
which  the  line  of  demarcation  can  not  be  accurately 
drawn."  f  Nevertheless  he  accepted  the  convenient  use 
of  circulating  capital  as  meaning  wages-capital.  He  so 
used  it  in  the  passage  just  cited;  and  in  another,  on  the 
very  page  which  in  a  note  criticises  the  distinction  between 
circulating  capital  and  other  capital,  the  text  says  that  in 
in  some  trades  "  very  little  capital  may  be  employed  as 
circulating  capital,  that  is  to  say,  in  the  employment  of 
labour."  Ricardo  was  not  trained  to  great  nicety  in 
phraseology.  Sometimes  he  used  circulating  capital  to 
stand  for  the  part  of  capital  which  constitutes  demand  for 
labor;  quite  as  often,  as  has  just  been  noted,  he  used 
capital  alone.  He  speaks  roughly  of  *'  the  impulse  which 
an  increased  capital  gives  to  a  new  demand  for  labour  "  ; 
"in  proportion  to  the  increase  of  capital  will  be  the  in- 
crease in  the  demand  for  labour  "  ;  J  "  experience  teaches 

*  Essay  on  the  Influence  of  a  Low  Price  of  Corn,  Works,  pp.  371,  372. 
f  Works,  p.  21,  note. 

\  Works,  p.  51  ;  Principles,  ch.  v.     Both  of  the  passages  first  quoted 
are  on  the  same  page. 


174  WAGES   AND   CAPITAL. 

that  capital  and  population  alternately  take  the  lead,  and 
wages  in  consequence  are  liberal  and  scanty."*  The  de- 
mand for  labor  is  frequently  mentioned  rather  as  propor- 
tioned to  the  total  amount  of  capital  than  as  equal  to  that 
amount ;  and  such  a  mode  of  stating  the  relation,  it  may 
be  observed,  is  more  common  in  the  Principles  than  in  the 
earlier  writings.  We  have  thus  a  considerable  variety  of 
phrases,  strictly  consistent  only  in  that  the  immediate 
source  of  wages  was  regarded  as  some  part  of  capital. 

That  Ricardo  was  thus  careless  in  his  language,  arose 
in  part  perhaps  from  lack  of  literary  training,!  but  more 
largely  from  the  fact  that  his  attention  was  fastened 
mainly  on  permanent  profits  and  permanent  wages.  As 
to  permanent  profits  it  was  immaterial  whether  capital  at 
any  one  time  consisted  in  large  or  in  small  part  of  "circu- 
lating "  capital  or  wages  fund.  The  essential  thing  was 
that  the  whole  of  capital  represented  advances  to  laborers. 
Whether  the  advances  were  made  earlier  or  later,  and 
whether  spread  over  a  longer  or  shorter  period,  profits  de- 
pended in  the  end  solely  on  what  the  laborers  produced 
over  and  above  what  had  been  turned  over  to  them.  Per- 
manent or  "natural  "  wages,  on  the  other  hand,  depended 
simply  on  the  price  of  food.  The  immediate  advance  of 
"capital  "  or  "  circulating  capital  "  to  laborers  determined 
only  market  wages,  which  adjusted  themselves  to  "natu- 
ral "  wages  by  the  process,  believed  by  Ricardo  to  be 
comparatively  rapid,  of  a  variation  in  the  number  of  labor- 


*  Works,  p.  379  ;  Essay  on  the  Influence  of  a  Low  Price  of  Corn. 
This  was  an  idea  of  Malthus's,  by  whom  Ricardo  thought  the  proof  from 
experience  had  been  supplied. 

f  "  Like  most  people  who  have  not  had  the  advantage  of  a  literary 
education,  Ricardo  was  apt  to  think  that  a  word  ought  to  have  whatever 
sense  he  found  convenient  to  put  upon  it."  Cannan,  History  of  the  The- 
ories of  Production  and  Distribution,  p.  195.  There  is  a  good  degree  of 
truth  in  this  remark,  however  ungraciously  it  is  put. 


RICARDO. 


.'75 


ers.  It  thus  made  no  difference,  either  as  to  permanent 
profits  or  permanent  wages,  how  much  of  total  capital 
happened  to  take  in  any  one  season  the  form  of  fresh  ad- 
vances to  laborers. 

Up  to  this  point,  the  conclusions  of  the  present  chap- 
ter are  not  of  any  precise  sort ;  showing  indeed  that  Ri- 
cardo  emphasized,  in  one  way  and  another,  the  proposition 
that  wages  are  paid  from  capital,  but  not  showing  that 
he  held  to  the  doctrine  of  an  inelastic  and  predetermined 
wages  fund.  It  was  intimated  at  the  outset  of  the  chap- 
ter, however,  that  he  had  laid  down,  even  though  in  brief 
terms,  a  doctrine  of  a  more  specific  and  rigid  sort.  It  re- 
mains to  be  seen  what  further  and  more  detailed  views  on 
this  part  of  the  subject  he  can  be  shown  to  have  enter- 
tained. 

Ricardo  follows  Adam  Smith  in  speaking  of  "  the  funds 
destined  for  the  maintenance  of  labour  "  ;  using  this  phrase 
quite  as  often  as  "capital  "  or  "circulating  capital,"  when 
he  is  speaking  of  the  proximate  causes  determining  market 
wages.  What  he  conceives  these  funds  to  be,  he  says 
most  explicitly,  not  in  his  chapter  on  Wages,  where  we 
might  expect  to  find  the  statement,  but  in  the  later  chap- 
ter which  treats  of  taxes  on  raw  produce  and  food.  In- 
cidentally to  the  discussion  of  the  incidence  of  such  taxes, 
we  have  a  deliberate  and  detailed  explanation  of  the  na- 
ture and  the  limitation  of  the  funds  for  the  maintenance 
of  labor.* 

A  tax  on  food  will  not  permanently  affect  real  wages. 
One  of  the  simplest  applications  of  Ricardo's  doctrine  on 
"  natural  "  wages  was  that  such  a  tax  would  raise  the 
price  of  food;  that  "wages  would  inevitably  and  necessa- 
rily rise " ;  and  profits  would  have  to  shoulder  the  tax. 
The  dependence  of  profits  on  the  price  of  food,  via  wages, 

*  Chapter  ix  of  the  Principles,  "  Taxes  on  Raw  Produce." 
13 


176  WAGES     AND   CAPITAL. 

is  the  cornerstone  of  Ricardo's  theory  of  distribution, — 
and,  at  the  same  time,  it  may  be  admitted,  its  weakest 
part.  But  it  might  be  objected  "that  there  would  be  a 
considerable  interval  between  the  rise  in  the  price  of  corn 
and  the  rise  of  wages,  during  which  much  distress  would 
be  experienced  by  the  labourer."  The  objection  leads 
Ricardo  to  consider  how  close  is  the  connection  between 
the  price  of  food  and  money  wages,  and  so  to  consider 
the  causes  which  at  any  one  time  determine  real 
wages. 

"The  wages  of  labour  are  really  regulated  by  the  pro- 
portion between  the  supply  and  demand  of  necessaries, 
and  the  supply  and  demand  of  labour;  and  money  is 
merely  the  medium,  or  measure,  in  which  wages  are  ex- 
pressed." This  is  the  sound  view,  which  Adam  Smith  had 
stated  so  emphatically  ;  but  Ricardo  carries  it  to  conse- 
quences which  Adam  Smith  never  dreamed  of.  Anything 
which  decreases  the  supply  of  necessaries  (the  real  "  funds 
for  maintaining  labourers  ")  lowers  wages,  so  long  as 
population  is  the  same ;  anything  which  leaves  that  supply 
fixed,  can  not  affect  them.  A  bad  harvest  reduces  the 
quantity  of  necessaries  ;  and  however  money  wages  may 
be  made  to  rise  "  through  misapplication  of  the  poor  laws," 
real  wages  must  fall.  Any  attempt  to  regulate  wages  in 
such  time  by  the  money  price  of  food  "affords  no  real 
relief  to  the  labourer,  because  its  effect  is  to  raise  still 
higher  the  price  of  food,  and  at  last  he  must  be  obliged 
to  limit  his  consumption  in  proportion  to  the  limited 
supply." 

The  situation  is  different  if  a  tax  is  imposed  on  food. 
Then  the  quantity  remains  unchanged  ;  real  wages  are  not 
affected  even  for  the  moment. 

"  A  tax  on  corn  does  not  necessarily  diminish  the  quantity  of 
corn,  it  only  raises  its  money  price  ;  it  does  not  necessarily  dimin- 
ish the  demand  compared  with  the  supply  of  labour ;  why  then 


RICARDO. 


177 


should  it  diminish  the  portion  paid  to  the  labourer?  Suppose  it 
true  that  it  did  diminish  the  quantity  given  to  the  labourer,  in 
other  words,  that  it  did  not  raise  his  money  wages  in  the  same 
proportion  as  the  tax  raised  the  price  of  the  corn  which  he  con- 
sumed ;  would  not  the  supply  of  corn  exceed  the  demand  ? — would 
it  not  fall  in  price  ?  and  would  not  the  labourer  thus  obtain  his 
usual  portion  ?  "  * 

The  result  is  the  same  in  any  other  case  in  which  the 
price  of  food  is  raised,  but  the  quantity  of  it  constituting 
the  demand  for  labor  remains  unchanged.  Thus,  there 


*  The  rest  of  the  passage  may  be  given,  though  it  does  not  bear  di- 
rectly on  the  present  subject : 

"  In  such  case,  indeed,  capital  would  be  withdrawn  from  agriculture  ; 
for  if  the  price  were  not  increased  by  the  whole  amount  of  the  tax,  agri- 
cultural profits  would  be  lower  than  the  general  level  of  profits,  and  capi- 
tal would  seek  a  more  advantageous  employment.  In  regard,  then,  to  a 
tax  on  raw  produce,  which  is  the  point  under  discussion,  it*  appears  to  me 
that  no  interval  which  could  bear  oppressively  on  the  labourer,  would 
elapse  between  the  rise  in  the  price  of  raw  produce,  and  the  rise  in  the 
wages  of  the  labourer  ;  and  that  therefore  no  other  inconvenience  would 
be  suffered  by  this  class,  than  that  which  they  would  suffer  from  any 
other  mode  of  taxation,  namely,  the  risk  that  the  tax  might  infringe  on 
the  funds  destined  for  the  maintenance  of  labour,  and  might  therefore 
check  or  abate  the  demand  for  it." 

It  is  not  easy  to  make  out  by  what  process  Ricardo  thought  the  tax 
on  food  would  raise  its  price.  His  language  in  this  chapter  usually  im- 
plies that  the  effect  would  be  immediate  ;  and  certainly  he  thinks  that, 
if  this  happened,  money  wages  also  would  rise  immediately.  But  it  is 
more  in  accord  with  his  general  mode  of  reasoning,  and  with  the  drift  of 
this  passage,  to  interpret  him  as  concluding  that  the  price  of  food  would 
not  rise  at  once.  The  first  incidence  of  the  tax  is  on  agricultural  profits  ; 
then  comes  a  withdrawal  of  agricultural  capital,  a  diminution  of  the 
supply  of  food;  and  so  a  rise  in  price.  How,  after  this,  "no  interval 
which  could  bear  oppressively  on  the  labourer,  would  elapse  between 
the  rise  in  the  price  of  raw  produce,  and  the  rise  in  the  wages  of  the 
labourer,"  it  is  difficult  to  see.  Apparently  money  wages  can  then  rise 
only  in  consequence  of  a  decline  in  population  :  a  process  which  in  fact 
must  bear  very  oppressively. 


j^S  WAGES   AND   CAPITAL. 

may  be  a  general  rise  of  prices,  and  so  a  rise  in  the  price 
of  food, 

"  in  consequence  of  an  influx  of  the  precious  metals  from  the  mines 
or  from  the  abuse  of  the  privileges  of  banking.  It  leaves  undis- 
turbed too  the  number  of  labourers,  as  well  as  the  demand  for 
them  ;  for  there  will  be  neither  an  increase  nor  a  diminution  of 
capital.  The  quantity  of  necessaries  to  be  allotted  to  the  labourer, 
depends  on  the  comparative  demand  and  supply  of  necessaries, 
with  the  comparative  demand  and  supply  of  labour :  money  being 
only  the  medium  in  which  the  quantity  is  expressed ;  and  as  neither 
of  these  is  altered,  the  real  reward  of  the  labourer  is  not  altered."  * 

It  would  be  difficult  to  find  in  the  writings  of  the  clas- 
sic economists  a  more  direct  statement  of  a  predetermined 
fund,  all  of  which  must  go  to  the  laborers.  The  demand 
for  labor  is  here  treated  as  that  part  of  capital  which  ex- 
ists in  the  form  of  necessaries  or  food.  No  doubt  Ricardo 
is  discussing  primarily  the  effects  of  a  tax  on  food,  not  of 
capital  and  market  wages.  But  he  habitually  spoke  of 
wages  as  consisting  of  food  which  the  laborers  can  not 
dispense  with,  and,  in  the  very  passages  cited,  identifies 
the  food  with  their  real  reward.  At  any  moment,  there  is 
just  so  much  food  on  hand,  and  all  of  that  the  laborers 
will  certainly  get.  No  tax  on  food,  no  artificial  rise  in 
prices,  can  prevent  them  from  getting,  during  the  season, 
what  is  on  hand  for  the  season. 

Another  question  would  naturally  be  asked  by  one 
who  followed  Ricardo  so  far.  If  the  laborers  must  get  at 
least  so  much,  does  it  follow  that  they  can  not  get  more  ? 
Ricardo  never  was  led  to  give  a  clear  intimation  of  his 
opinions  on  this  further  point.  In  the  course  of  the  same 
discussion  of  taxes  on  food,  he  remarks  that  "  an  accumu- 


*  Works,  pp.  93-97.  I  have  not  followed  Ricarclo's  arrangement  of 
the  matter  in  this  summary  ;  but  the  changes  in  no  way  affect  the  sub- 
stance of  his  reasoning. 


RICARDO. 


179 


lation  of  capital  naturally  produces  an  increased  compe- 
tition among  the  employers  of  labour,  and  a  consequent 
rise  in  its  price.  The  increased  wages  are  not  always  im- 
mediately expended  on  food,  but  are  first  made  to  con- 
tribute to  the  other  enjoyments  of  the  labourer."*  This 
might  perhaps  be  interpreted  to  imply  an  elastic  supply  of 
commodities  which,  though  not  food,  yet  constituted  part 
of  "  the  real  funds  for  maintaining  labourers."  But  it  is 
more  in  accord  with  Ricardo's  general  reasoning  to  inter- 
pret him  as  speaking  here  of  the  results  of  several  seasons 
of  higher  wages.  At  first,  higher  money  wages  could  not 
bring  higher  real  wages;  but  after  a  season  or  two,  the 
increased  money  demand  for "  other  enjoyments  "  by  labor- 
ers and  the  consequent  higher  prices  of  these  "other  en- 
joyments "  would  lead  to  a  greater  production  of  them. 
Eventually,  the  laborers  would  increase  in  numbers,  and 
demand  more  food.  The  other  enjoyments  would  disap- 
pear, food  would  be  more  costly  from  the  resort  to  poorer 
land,  money  wages  would  permanently  rise,  real  wages  (in 
the  sense  important  for  the  laborers)  would  return  to  the 
point  from  which  they  started.  Such  are  the  details  by 
which,  if  this  interpretation  of  his  views  is  sound,  Ricardo 
would  have  described  the  changes  in  wages  resulting  from 
a  greater  demand  for  labor. f 

*  Works,  p.  95. 

f  One  other  passage  from  Ricardo's  writings  may  be  cited  at  this 
point.  In  one  of  his  letters  to  Malthus,  written  in  1815,  he  expresses 
himself  thus : 

"  If,  instead  of  4,  10  measures  could  be  produced  by  a  day's  labour- 
no  rise  would  take  place  in  wages,  no  greater  portion  of  corn,  cloth,  or 
cotton,  would  be  given  to  the  labourer,  unless  a  portion  of  the  increased 
produce  were  employed  as  capital,  and  then  the  rise  in  wages  would  be  in 
proportion  to  the  new  demand  for  labour,  and  not  at  all  in  proportion  to 
the  increase  in  the  quantity  of  commodities  produced.  ...  In  the  case 
of  great  improvements  in  machinery  ...  no  demand  for  additional 
labour  will  take  place  unless  the  increased  production  in  consequence  of 


WAGES   AND    CAPITAL. 

It  would  be  a  mistake  to  infer  too  much  from  these 
passages.  They  intimate,  undoubtedly,  a  rigid  sort  of 
wages  fund, — an  inflexible  predetermination  of  the  wages 
of  the  moment.  But  they  are  incidental  to  another  topic, 
and  Ricardo  probably  was  not  reflecting  at  all  on  the 
question  of  market  wages  except  in  its  connection  with 
the  price  of  food.  They  are  important,  not  so  much  in 
the  specific  content,  as  because  they  bring  into  vivid  relief 
the  unflinching  manner  in  which  Ricardo  carried  his  rea- 
soning to  its  last  consequences.  His  habit  of  mind,  and 
his  general  doctrines,  would  have  led  him  easily  to  main- 
tain the  existence  of  such  a  fund;  but,  except  in  such  in- 
cidental discussion  as  has  just  been  noticed,  Ricardo  never 
made  any  careful  statement  of  his  views  as  to  a  clear-cut 
and  predetermined  wages  fund. 

At  all  events,  it  is  in  the  example  which  he  set  of  rigid 
reasoning  and  unqualified  statement,  that  Ricardo  exer- 
cised greatest  influence  on  the  presentation  of  the  wages 
fund  doctrine  by  later  hands.  The  particular  passages 
just  discussed  were  not  referred  to,  in  their  bearing  on 
wages,  by  any  of  the  writers  of  the  next  generation.  But 
his  modes  of  reasoning  and  of  statement  affected  his  suc- 
cessors powerfully,  and  gave  economic  theory  a  method 
and  a  direction  which  were  retained,  in  England  at  least, 
for  half  a  century.  The  prominent  place  which  the  analy- 
sis of  capital  into  advances  for  laborers  held  in  his  writ- 
ings at  large,  probably  affected  the  wages  fund  discussion 
more  than  did  the  comparatively  brief  passages  in  which 
the  question  of  market  wages  is  specifically  considered. 

the  improvements  should  lead  to  further  accumulation  of  capital."-  Let- 
ters of  Ricardo  to  Malthas,  edited  by  Bonar,  pp.  98,  99. 

This  does  not  throw  any  further  light  on  the  details  of  Ricardo's  think- 
ing as  to  the  wages  fund  ;  but  it  is  interesting,  because  expressing  in 
terms  a  conclusion  which  would  certainly  flow  from  his  general  reasoning, 
and  which  touches  the  gist  of  much  recent  controversy  on  the  wages  fund. 


RICARDO.  1 8 1 

The  operations  of  capitalists  consist  in  making  advances 
to  laborers ;  market  wages  depend  on  the  ratio  between 
population  and  capital, — these  two  general  propositions, 
combined  with  the  example  of  rigid  deductive  reasoning, 
had  most  effect  on  the  treatment  of  the  theory  of  wages 
by  Ricardo's  successors  and  followers. 

To  summarize.  Ricardo  developed  the  theory  of  capi- 
tal and  wages  in  two  directions.  He  put  forth  the  doc- 
trine that  all  capital  is  resolvable  into  advances  to  labor- 
ers, and  that  therefore  wages  and  profits  are  inverse  to 
each  other.  Faint  germs  of  the  doctrine  are  to  be  found 
in  Adam  Smith  ;  the  conclusion  as  to  the  inverse  relation 
of  wages  and  profits  is  explicitly  stated  by  him  ;  but  the 
ground  on  which  Ricardo  reached  it  was  never  really 
touched  by  the  earlier  writer.  Ricardo  himself  stated  it 
rather  by  implication  than  explicitly  ;  but  it  runs  so  plainly 
under  all  his  reasoning  on  distribution  that  no  one  there- 
after could  fail  to  consider  it.  Next,  Ricardo  laid  it  down 
that  "  market  "  wages  depended  on  the  demand  and  supply 
of  labor,  and  that  the  demand  for  labor  came  from  the 
capital  of  those  who  hired  laborers  for  production.  Here 
Adam  Smith  had  done  more  than  to  furnish  the  germs  of 
the  doctrine  :  the  doctrine  itself  is  prominent  in  the  Wealth 
of  Nations.  But  Ricardo  gave  it  sharper  outline,  and  a 
more  universal  application.  He  brushed  aside  all  labor- 
ers except  those  hired  by  capitalists.  If  asked  whether 
other  laborers  existed,  he  must  have  replied  in  the  affirm- 
ative ;  and  if  asked  whether  their  remuneration  presented 
problems  to  which  his  theories  on  wages  gave  no  sufficient 
answers,  he  must  at  least  have  hesitated,  and  considered 
the  case  further, — with  what  result  every  student  of  Ri- 
cardo will  make  his  own  guess.  But  the  questions  were 
rarely  asked  and,  if  asked,  got  no  attention.  The  insular 
horizon  of  almost  all  the  English  economists  of  that  pe- 
riod prevented  them  from  touching  other  phenomena  than 


!82  WAGES   AND   CAPITAL. 

those  presented  in  their  own  country.  Ricardo's  simple 
formula  as  to  the  proportion  of  capital  to  population,  re- 
inforced as  it  was  by  what  Adam  Smith  and  his  immediate 
successors  had  said,  seemed  to  answer  all  questions  worth 
the  asking  about  the  proximate  forces  determining  wages. 
And,  finally,  there  is  evidence  of  a  distinct  opinion  on 
Ricardo's  part  as  to  the  rigidity  of  the  part  of  the  capital 
which  could  go  to  laborers  in  any  one  season;  but  this 
bears  rather  on  Ricardo's  own  conclusions  than  on  the  in- 
fluence which  he  exerted  on  the  generation  of  economists 
who  folloived  him. 


CHAPTER   X. 

FROM    RICARDO    TO    JOHN    STUART    MILL. 

WE  come  now  to  the  period  of  active  discussion  which 
begins  with  Ricardo  and  ends  with  John  Stuart  Mill  ;  the 
period  in  which  the  doctrines  of  the  classic  economists 
gradually  secured  their  strongest  hold  on  students  and 
thinkers,  and  in  which  the  wages  fund  doctrine  is  often 
supposed  to  have  arisen  and  flourished.  All  of  the  writers 
of  the  period  were  contemporaries  of  Ricardo;  most  of 
them  knew  him,  or  might  have  known  him,  in  person. 
Their  writings,  however,  were  published  after  his,  and  with 
hardly  an  exception  were  profoundly  affected  by  his 
compact  array  of  clear-cut  and  consistent  doctrines.  On 
wages,  as  on  other  subjects,  they  showed  the  unmistakable 
traces  of  his  influence  ;  and  it  is  very  doubtful  if  all  their 
discussion  on  this  topic  added  anything  substantial  to 
what  had  been  built  up  by  Adam  Smith  and  Ricardo. 

In  following  the  discussion  by  these  later  writers,  it 
will  be  convenient  to  neglect  the  chronological  sequence 
of  their  publications,  and  to  group  them  according  to  the 
temper  in  which  they  approached  economic  questions.  We 
may  consider  first  those  writers  who,  like  the  elder  Mill 
and  M'Culloch,  followed  Ricardo  and  Adam  Smith  with 
loyal  fidelity,  and  made  little  profession  of  differing  with 
their  masters  or  of  improving  on  them.  Thereafter,  the 
writers  of  earlier  or  later  date  may  be  taken  up,  whose 
attitude  was  more  independent  and  critical;  whether,  like 

183 


WAGES   AND   CAPITAL. 

Senior,  they  were  in  general  accord  with  the  dominant 
views,  or,  like  Richard  Jones,  protested  vigorously  against 
them. 

First  in  the  list  of  the  Epigonen,  as  the  Germans,  not 
without  a  good  show  of  reason,  dub  this  group  of  writers, 
comes  James  Mill,  the  intimate  friend  of  Ricardo  and 
Bentham.  James  Mill  probably  exerted  a  more  enduring 
influence  on  the  course  of  economic  thought  through  the 
remarkable  training  in  Ricardian  economics  which  he 
gave  his  son,  than  through  his  own  writings  ;  *  yet  these 
have  an  independent  value,  and  are  significant  of  the  stage 
which  the  theory  of  wages  now  had  reached. 

In  the  opening  chapter  of  his  Elements  of  Political 
Economy^  James  Mill  starts  in  a  fresh  and  promising 
fashion.  He  distinguishes  sharply  between  capital  and 
wages.  Instruments  and  materials  are  "  all  that  can  be 
correctly  included  in  the  idea  of  capital.  It  is  true  that 
wages  are  in  general  included  in  that  idea  " ;  but  this  is 
an  error,  "  the  idea  of  the  subsistence  or  consumption 
of  the  labourer,  for  which  wages  is  but  another  name,  is 
included  in  the  idea  of  the  labour."  \  Here  we  have  a 
distinction  which  anticipates  some  very  modern  discus- 
sion. Mill  presently  adds  that  the  laborer's  subsistence 
or  wages,  "being  advanced  by  the  capitalist  out  of  those 
funds  which  would  otherwise  have  constituted  capital  in 
the  distinctive  sense  of  the  word,  and  being  considered  as 
yielding  the  same  advantages,  it  is  uniformly  spoken  of 
under  the  name  of  capital,  and  a  confusion  of  ideas  is  the 
consequence." 

If  this  first  step  had  been  followed  up,  we  might  have 


*  Sec  the  younger  Mill's  Autobiography,  pp.  27-29. 
f  First  published  in  1821  ;  a  second  edition  appeared  in  1824,  a  third 
in  1826.     I  quote  from  the  second  edition,  the  only  one  I  have  seen. 
\Elcmcitts,  pp.  17,  1 8. 


FROM    RICARDO    TO   JOHN    STUART    MILL.         ^5 

had  with  James  Mill  a  new  and  important  stage  in  the 
development  of  the  theory  of  capital  and  wages.  But  he 
never  got  beyond  this  first  step,  and  seems  to  have  for- 
gotten that  he  ever  took  it.  When  he  has  completed  the 
introductory  chapter  on  capital  and  labor,  from  which  the 
passages  just  quoted  are  taken,  and  proceeds  to  the 
separate  treatment  of  distribution  and  wages,  he  has  noth- 
ing more  to  say  of  the  confusion  of  ideas  in  regard  to 
capital  and  labor.  He  slides  easily  and  quickly  into  the 
familiar  statement  that  wages  depend  on  capital.  It  is  true 
that  he  begins  by  saying  that  both  laborers  and  capitalists 
get  their  reward  from  the  commodity  they  produce,  "  or 
the  value  of  it  " ;  and  that  "  to  suit  the  convenience  of  the 
labourers,"  they  receive  their  share  of  the  commodity  in 
advance,  in  the  shape  of  wages.  But  he  passes  at  once  to 
the  proof  that  "  the  rate  of  wages  depends  on  the  propor- 
tion between  Population  and  Employment,  in  other  words, 
Capital," — this  being  the  italicized  summary  of  the  sec- 
tion in  which  the  rate  of  wages  is  examined.  Apparently 
"  capital  "  here  means  not  only  tools  and  materials,  but 
subsistence  also.  For  the  supposition  is  made  that  the 
number  of  laborers  increases,  while  the  amount  of  "food, 
tools,  and  materials  "  remains  the  same  :  then  wages  must 
fall.  The  point  of  view  is  shifted  within  a  page,  within  a 
paragraph,  from  a  treatment  which  contemplates  a  shar- 
ing of  product  between  laborers  arid  capitalists,  to  a  con- 
sideration of  the  ratio  between  the  number  of  laborers 
and  the  total  "  means  of  employment  "  or  "  requisites  of 
production," — both  phrases  being  used.  Thereafter  we 
hear  simply  of  a  ratio  between  capital  and  population:  the 
familiar  formula  emerges.  "Universally,  then,  we  may 
affirm,  other  things  remaining  the  same,  that  if  the  ratio 
which  capital  and  population  bear  to  one  another  remains 
the  same,  wages  will  remain  the  same;  if  the  ratio  which 
capital  bears  to  population  increases,  wages  will  rise  ;  if 


1 86  WAGES   AND   CAPITAL. 

the    ratio  which    population    bears   to    capital    increases, 
wages  will  fall."* 

The  use  made  of  this  formula  is  characteristic  of  the 
drift  of  the  discussion  of  wages  among  English  econo- 
mists for  the  next  half-century.  Mill  proceeds  at  once, 
after  giving  but  a  page  or  two  to  the  universal  proposi- 
tion, to  the  corollary  which,  to  his  mind  and  that  of  his 
contemporaries,  made  it  mainly  important.  Population 
had  a  "  natural  tendency  "  to  increase  faster  than  capital  : 
hence  are  wages  low,  and  the  condition  of  the  great  body 
of  the  people  poor  and  miserable.  Their  condition  can 
improve  only  if  the  tendency  of  population  to  increase  is 
checked  by  prudence.  This  was  the  point,  however  spe- 
ciously it  was  concealed  at  the  outset,  at  which  the  whole 
reasoning  was  aimed.  And  for  this,  it  was  not  material 
whether  the  thing  to  which  population  bore  a  ratio  was 
entitled  "  capital  "  or  "  subsistence  "  or  "  commodity  "  or 
"wealth,"  so  long  as  it  was  made  to  appear  that  popula- 
tion had  the  "natural  tendency"  to  increase  at  the  more 
rapid  rate.  James  Mill  accepted  the  familiar  phrase 
"capital"  to  describe  the  resources  which  could  not  be 
expected  to  grow  as  fast  as  population,  even  though  he 
had  expressly  defined  capital  in  a  manner  which  might 
have  led  him  to  consider  afresh  the  precise  grounds  on 
which  his  predecessors  had  laid  it  down  that  laborers  were 
paid  or  supported  from  capital.  But  he  had  no  great  in- 
terest in  such  an  inquiry,  absorbed  as  he  was,  in  common 
with  his  brother  economists,  in  questions  of  production 
and  exchange.  So  far  as  wages  were  concerned,  the  Mal- 
thusian  doctrine  and  the  pressure  of  population  were  the 
main  things  to  be  considered:  the  details  by  which  wages 
might  be  shown  to  depend  on  capital  at  any  given  time, 
called  for  no  special  attention. 

*  Elements,  p.  44. 


FROM    RICARDO    TO   JOHN    STUART    MILL.         jg/ 

A  much  less  important  personage  than  James  Mill,  and 
a  much  less  familiar  name  to  economic  students,  is  Mrs. 
Jane  H.  Marcet,  who  seems  to  have  been  the  pioneer  in 
the  many  endeavors  made  in  this  eager  century  to  popu- 
larize political  economy.  Mrs.  Marcet  published  in  1816 
her  Conversations  on  Political  Economy,  a  series  of  imaginary 
conversations  between  "  Caroline,"  an  ingenuous  maiden, 
and  "  Mrs.  B.,"  a  wise  old  lady,  who  naturally  does  most 
of  the  talking.  The  book  had  no  little  vogue  in  its  day, 
going  through  four  editions  between  1816  and  1821  ;  and 
it  gives  interesting  indications  of  the  shape  in  which  eco- 
nomic doctrines  then  were  interpreted  by  a  person  of 
'good  intelligence  who  did  not  affect  to  have  any  theories 
of  her  own  making. 

In  the  conversation  on  capital,  the  difference  between 
rich  and  poor  is  first  referred  to  ;  then  the  circumstance 
that  the  rich,  to  maintain  and  employ  their  capital,  must 
advance  it  to  the  poor;  the  perpetual  consumption  and 
reproduction  of  capital ;  profit  arising  from  the  fact  that 
laborers  produce  more  than  is  advanced  to  them, — all 
this  is  neatly  expounded,  with  a  characteristic  comment 
that  it  is  "  one  of  the  most  beneficent  ordinations  of  Provi- 
dence that  the  employment  of  the  poor  should  be  a  neces- 
sary step  to  the  increase  of  the  wealth  of  the  rich."* 
Those  who  are  disposed  to  judge  the  classic  writers  by 
their  fruits  may  not  unnaturally  be  roused  to  wrath  by 
such  a  teleology.  When  it  comes  to  wages,  the  inquiring 
Caroline  is  informed  first  that  they  depend  on  the  habits 
of  the  poor  and  the  degree  of  prudence  they  practice  in 
multiplying, — the  exposition  resting  faithfully  on  Mal- 
thus.  Shortly  after,  it  is  laid  down  in  terms  that  wages 
depend  on  the  ratio  of  capital  to  laborers.  Plenty  of 
capital  may  indeed  coexist  with  low  wages,  if  the  laborers 


Conversations,  p.  98. 


1 88  WAGES    AND   CAPITAL. 

also  are  numerous, — thus  in  China;  while  capital,  though 
absolutely  scarce,  may  yet  be  plentiful  relatively  to  the 
number  of  laborers, — thus  in  America.  The  primary  propo- 
sition that  wages  depend  on  capital  is  proved,  after  the 
fashion  of  the  time,  by  analyzing  a  simple  case:  a  ship- 
wrecked crew  is  supposed  to  land,  stripped  and  forlorn,  on 
an  island  where,  obviously  enough,  they  must  depend  on 
the  original  settlers  "  for  maintenance  and  employment."  * 
The  reader  conversant  with  the  economic  literature  of 
England  during  the  first  half  of  the  present  century,  need 
not  be  told  how  familiar  a  ring  all  this  has,  or  how  faith- 
fully it  reflects  the  expositions  long  current  of  the  theory 
of  wages.  The  reason  for  singling  out  for  mention  this 
particular  bit  of  popularizing  literature  is  the  early  date 
at  which  it  appeared,  and  the  evidence  it  supplies  of  the 
source  whence  the  whole  train  of  thought  was  derived. 
Mrs.  Marcet  first  published  her  Conversations  in  1816,  at 
a  time  when  Ricardo  was  known  almost  exclusively  by  his 
pamphlets  on  monetary  subjects,  and  when  the  writers  to 
whom  the  maker  of  a  tract  would  look  for  guidance  were 
mainly  Adam  Smith  and  his  immediate  successors. f  Ri- 
cardo is  mentioned  in  the  preface,  and  evidently  is  fol- 
lowed by  Mrs.  Marcet  in  the  exposition  of  money,  coinage, 
and  prices.  But  on  value,  Adam  Smith's  analysis  of  cost 
of  production' into  its  constituent  parts, — wages,  profits, 
and  rent, — is  faithfully  followed.  On  foreign  trade  there 
is  similarly  no  trace  of  Ricardo's  unmistakable  doctrines; 
indeed,  Adam  Smith  is  followed  in  a  doctrine  which  no 

*  Conversations,  pp.  122,  124,  136,  143.  The  illustrations  from  China 
and  America  are  obviously  taken  from  the  Wealth  of  Nations,  Book  I, 
ch.  viii,  p.  32. 

\  Ricardo's  Essay  on  the  Influence  of  a  Loiu  Price  of  Corn  was  pub- 
lished in  1815,  and  the  essence  of  all  his  characteristic  doctrines  can  be 
found  in  this  compact  tract  ;  but  they  are  presented  in  a  manner  to 
reach  the  understanding  of  only  a  very  small  circle  of  readers. 


FROM    RICARDO    TO   JOHN    STUART    MILL. 

follower  of  Ricardo  would  fail  to  reject, — his  eulogy  on 
the  home  trade  as  yielding  more  "  encouragement  to  in- 
dustry "  than  the  foreign  trade.  Clearly,  the  wages  fund, 
essentially  in  the  form  in  which  it  was  retained  for  the 
next  generation,  is  here  found  in  a  writer  who  derived  her 
knowledge  and  inspiration  from  economic  literature  as  it 
stood  before  Ricardo's  peculiar  doctrines  had  been  in- 
corporated into  it.  The  dependence  of  wages  on  capital, 
the  ratio  of  capital  to  population,  the  standard  of  living 
and  the  "  habits  "  of  the  population  as  the  important  deter- 
mining factors, — these  are  the  doctrines  which  the  popu- 
larizer  gathered  from  the  political  economy  of  the  day. 
They  are  evidently  derived,  in  the  main,  from  Adarn  Smith 
and  Malthus.  Ricardo  soon  put  his  stamp  on  them  ;  but 
before  his  day  the  essentials  could  easily  be  put  together. 
Next  among  those  who  represent  the  views  current  in 
their  day,  comes  a  writer  who  would  have  been  highly 
indignant  at  finding  himself  ranked  in  any  way  with  so 
modest  a  personage  as  Mrs.  Marcet, — John  Ramsay 
M'Culloch,  member  of  the  Institute  of  France,  editor  of 
the  works  of  Adarn  Smith  and  Ricardo,  author  of  a  widely- 
accepted  exposition  of  the  Principles  of  Political  Economy 
and  of  many  other  works  of  repute,  ever  a  welcome  con- 
tributor to  the  reviews  and  the  cyclopaedias,  honored 
witness  before  Parliamentary  commissions, — in  fact,  the 
most  prominent  figure  in  the  economic  world  in  the  period 
from  1820  to  1850.  The  fate  of  M'Culloch  is  a  warning 
to  those  who  bask  in  the  sunshine  of  general  favor.  Once 
the  authoritative  expounder  of  the  economic  gospel,  he  is 
now,  in  the  minds  of  those  who  would  be  in  the  van  of 
thought,  the  representative  of  all  that  is  bad  in  classic 
political  economy.  In  fact,  M'Culloch  has  been  made 
somewhat  of  a  scapegoat.  He  was  an  honest  and  an  able 
man,  who  did  good  service  in  his  day  in  spreading  knowl- 
edge and  in  contributing  helpfully  to  the  understanding 


ICp 


WAGES   AND    CAPITAL. 


of  many  concrete  questions.  Having  a  great  faith  in  the 
completeness  and  accuracy  of  his  own  knowledge,  and  a 
great  willingness  to  apply  the  formulas  of  the  day  to  any 
and  every  problem  that  might  appear,  he  naturally  stated 
the  doctrines  current  in  his  time  in  their  most  unqualified 
form,  and  became  a  ready  butt  for  those  of  a  later  day  who 
had  shaken  loose  from  them.  However  great  his  preten- 
sions as  a  man  of  science,  M'Culloch  was  but  a  popular- 
izer  of  the  doctrines  of  Adam  Smith,  Malthus,  and  Ricar- 
do,  and  stood  for  no  views  that  were  his  own  except  by  a 
process  of  absorption  from  others. 

M'Culloch  has  been  sometimes  spoken  of  as  the  author 
of  the  wages  fund  doctrine ;  *  but  there  is  an  a  priori  im- 
probability that  he  really  originated  any  independent  doc- 
trine whatever,  and  no  indication  that  he  did  more  in  this 
case  than  to  restate  and  put  into  more  definite  form  what 
had  been  worked  out  by  others.  M'Culloch  first  set  forth 
his  views  on  distribution  and  on  wages  in  the  article  on 
Political  Economy  which  he  contributed  to  the  supplement 
to  the  Encyclopedia  Britannica,  and  which  he  expanded  into 
his  Principles  of  Political  Economy  in  1825.  That  book 
went  through  five  editions  in  his  lifetime,  the  last  being 
published  in  1864.  Meanwhile  he  printed  in  1826  an  Essay 
on  Wages,  which  in  1854  was  revised  and  enlarged  as  a 


*  Thus  Mr.  John  Rae  remarks  (Contemporary  Socialism,  2cl  edition, 
p.  360)  that  M'Culloch  was  "  more  than  merely  the  expositor  of  that 
['  orthodox ']  system  ;  he  is  really  one  of  its  founders,  the  author  of  one 
of  its  famous  dogmas,  at  least  in  its  current  form,  the  now  exploded  doc- 
trine of  the  wages  fund."  And  Mr.  James  Bonar  (.Malthus  and  his 
Work,  p.  155,  American  edition)  tells  us  that  "the  theory  of  a  wages 
fund  was  formed  from  the  facts  of  a  perfectly  exceptional  time,  and  on 
the  strength  of  two  truths  misapplied,  the  doctrine  of  Malthus  (on  Popu- 
lation) in  its  most  unripe  form,  and  of  Ricardo  (on  Value)  in  its  most 
abstract.  J.  R.  M'Culloch  seems  to  have  been  the  first  who  put  the  two 
together." 


FROM    RICARDO    TO   JOHN    STUART    MILL.        .ICji 

Treatise  on  Wages.  In  all  these  writings,  not  to  mention 
others,  the  conclusions  and  the  form  of  statement,  even 
the  very  words,  are  repeated  with  exemplary  and  monot- 
onous consistency. 

To  quote  the  words  of  the  first  edition  of  the  Political 
Economy : 

"  The  capacity  of  a  country  to  support  and  employ  labourers  is 
in  no  degree  dependent  on  advantageousness  of  situation,  richness 
of  soil,  or  extent  of  territory.  ...  It  is  obviously  not  on  these  cir- 
cumstances, but  on  the  actual  amount  of  the  accumulated  produce 
of  previous  labour,  or  of  capital,  devoted  to  the  payment  of  wages, 
in  the  possession  of  a  country,  at  a  given  period,  that  its  power  of 
supporting  or  employing  labour  must  wholly  depend.  A  fertile  soil 
affords  the  means  of  rapidly  accumulating  capital  :  but  that  is  all. 
Before  this  soil  can  be  cultivated,  capital  must  be  provided  for  the 
support  of  the  labourers  employed  upon  it,  just  as  it  must  be  pro- 
vided for  the  support  of  those  engaged  in  manufactures,  or  in  any 
other  department  of  industry."  * 

This  is  all  that  M'Culloch  has  to  say  as  to  the  basis  of 
the  doctrine  that  wages  depend  on  the  capital  available 
for  paying  them.  The  same  language,  substantially,  is 
used  in  all  the  editions  of  the  Political  Economy,  and  in 
the  two  versions  of  the  Essay  on  \Vages.  Elsewhere,  in 
discussing  capital  as  a  means  of  increasing  the  produc- 
tiveness of  labor,  he  follows  Adam  Smith  in  saying  that 
the  accumulation  of  capital  must  precede  the  division  of 
labor ;  f  beyond  this,  there  is  no  further  consideration  of 
the  why  and  how  of  the  dependence  of  wages  on  capital. 
M'Culloch  was  an  ardent  and  faithful  follower  of  Adam 
Smith  and  Ricardo,  and  his  writing  has  the  easy  flow  of 
the  former  with  yet  the  angular  and  unqualified  doc- 
trines of  the  latter.  His  exposition  differs  from  theirs 

*  M'Culloch's  Political  Economy,  1st  edition,  p.  327. 

t  Ibid->  P-  95- 
14 


192 


WAGES   AND   CAPITAL. 


mainly  in  emphasis.  In  the  note  on  wages  which  he 
appended  to  his  edition  of  the  Wealth  of  Nations  (1828), 
he  put  the  doctrine  of  wages  and  capital,  as  it  stood 
with  Ricardo's  stamp  on  it,  with  characteristic  vehe- 
mence :  "  No  other  fund  [than  capital]  is  in  existence 
from  which  the  labourers,  as  such,  can  draw  a  single 
shilling."  * 

This  much  seemed  to  M'Culloch,  as  to  a  long  series  of 
writers  of  his  generation,  so  simple  and  self-evident  that, 
to  be  proved,  it  needed  but  to  be  stated.  He  passed  at 
once  to  the  phase  of  the  wages  question  which  did 
seem  to  need  all  possible  proof  and  illustration  :  to  the 
relative  growth  of  population  and  capital,  and  the  pressure 
of  population  on  subsistence.  Thus  he  reached,  in  the 
phrase  which  forms  the  caption  of  a  section  in  the  Essay 
on  Wages,  the  topic  of  "  natural  or  necessary  wages,  differ- 
ent in  different  countries  and  periods;  dependent  on  the 
quantity  and  species  of  the  articles  required  for  the  sub- 
sistence of  the  labourer."  When  he  thus  proceeded  to  the 
discussion  of  the  relative  growth  of  population  and  capi- 
tal, he  evidently  meant  by  "  capital "  simply  food,  and 
used  the  proposition  that  market  wages  depended  on  the 
ratio  of  population  to  capital,  chiefly  as  an  easy  introduc- 
tion to  the  Malthusian  doctrine.  It  was  with  more  or  less 
conscious  thought  of  the  ratio  of  food  to  population  that  he 
laid  it  down  in  sweeping  terms  that  "  the  rate  of  wages  /// 
all  countries  and  at  all  periods  depends  on  the  ratio  between 
the  portion  of  their  capital  allotted  to  paying  wages,  and 
the  number  of  their  labourers."  f 


*  Health  of  Nations,  M'Culloch's  edition,  p.  470. 

f  Tieatise  on  Wages  (1854),  p.  7. — In  this  tract  the  reader  will  find 
also  some  remarks  (at  pp.  49,  50)  about  the  advantages  of  high  wages  to 
the  capitalists,  because  they  bring  "  security  and  tranquillity"  and  are 
"  incomparably  the  best  defence  of  the  estates  and  mansions  of  the  rich." 
That  M'Culloch  could  insert  such  remarks  in  a  tract  designed  primarily 


FROM    RICARDO    TO   JOHN    STUART    MILL.         193 

There  is  little  indication  that  M'Culloch  ever  got  be- 
yond this  stage  in  the  wages  fund  doctrine.  It  remains, 
in  all  his  many  disquisitions,  simply  an  introduction  to  the 
Malthusian  discussion.  It  is  true  that  in  the  Political 
Economy,  he  inserted,  in  later  editions,  a  paragraph  or  two 
which  went  a  trifle  farther.  He  drew  the  corollary  that 
the  interests  of  laborers  and  capitalists  are  identical,  be- 
cause "  a  capitalist  can  not  increase  his  own  stock  without 
at  the  same  time,  and  to  the  same  extent,  increasing  the 
wealth,  or  the  means  'of  subsistence  of  the  working 
classes," — a  comforting  doctrine  very  like  that  of  Mrs. 
Marcet,  just  referred  to.  He  insisted,  too,  on  the  practi- 
cal certainty  that  "  all  the  capital,  through  the  higgling  of 
the  market,  will  be  equitably  distributed  among  all  the 
labourers";  hence  "it  is  idle  to  suppose  that  the  efforts 
of  capitalists  to  cheapen  labour  can  have  the  smallest  in- 
fluence on  its  medium  price."*  This  has  something  of 
the  ring  of  a  wages  fund  doctrine  with  rigid  lines,  suffi- 
cient for  the  explanation  of  any  and  all  questions  concern- 
ing wages.  M'Culloch,  in  another  passage  inserted  in  his 
later  editions,  mentioned  the  possibility  of  an  inquiry 
whether  "  an  increase  of  capital  is  synonymous  with  an 
increase  of  the  means  of  employing  labour."  \  He  disposes 
of  the  inquiry  summarily  by  referring  to  his  previous  dis- 
cussion of  the  effects  of  machinery  on  wages,  where  he 
conceived  that  he  had  shown  that  "the  introduction  of 
machinery  uniformly  increases  the  aggregate  demand  of 
society  for  labour  and  wages."  These  additions  to  his 

for  laborers'  reading,  shows  how  hopelessly  he  lacked  any  saving  sense  of 
humor. 

*  These  passages  are  quoted  from  the  fourth  edition  of  the  Political 
Economy  (1849),  PP-  3Q9~4°°-  I  have  not  seen  the  second  or  third  edi- 
tions, but  suspect  that  this  new  matter  may  have  been  inserted  as  early 
as  the  second  edition  (1830^ 

f  Fourth  edition,  p.  401. 


194 


WAGES   AND    CAPITAL. 


first  statements  show  that  M'Culloch  did  come  to  have 
some  glimpse  of  the  fact  that  there  were  some  questions 
on  the  relations  of  capital  to  wages  which  did  not  connect 
themselves  once  for  all  with  the  theory  of  population. 
But  he  never  followed  them  out,  or  discussed  them  :  briefly 
touched  on  them,  still  retaining  his  exposition  in  essen- 
tials as  he  had  first  given  it  to  the  public  when  a  young 
man  barely  in  his  majority.  It  is  significant  that  when  he 
touched  on  combinations  of  laborers  and  the  concrete 
questions  of  wages  which  arise  regarding  them,  he  said 
not  a  word  of  a  limitation  of  wages  by  capital,  or  of  any 
light  thrown  from  this  point  of  view  on  the  possible 
effects  of  trade  unions.  We  shall  have  occasion  pres- 
ently to  consider  his  attitude,  as  well  as  that  of  other 
writers,  on  combinations  and  trade  unions.  For  the 
present  it  suffices  to  note  that  he  virtually  did  not  cite 
the  wages  fund  at  all  on  this  aspect  of  the  problem:  a 
further  bit  of  evidence  as  to  the  use  of  the  doctrine,  by 
the  writers  of  this  period,  as  a  means  primarily  of 
proving  the  need  of  restraint  in  the  growth  of  popula- 
tion. 

One  or  two  other  writers  who  illustrate  still  further  the 
manner  in  which  wages  were  usually  set  forth  by  the  group 
to  which  M'Culloch  belonged,  may  receive  brief  mention. 
Like  M'Culloch,  they  assume  once  for  all  the  determina- 
tion of  wages  in  the  first  instance  by  the  ratio  between 
capital  and  population,  and  then  proceed  without  further 
ado  to  the  consideration  of  other  less  simple  matters. 
Torrens,  in  his  Essay  on  the  Production  of  Wealth  (1821), 
tried  to  take  a  middle  ground  between  Ricardo  and  Mal- 
thus  in  regard  to  the  mooted  questions  of  value;  but  on 
wages  he  assumed  as  a  matter  of  course  that  they  depend 
on  the  advance  of  subsistence  by  capitalists  to  laborers, 
and  then  pushes  this  line  of  thought  no  farther.  On  one 
point  only  does  he  even  stop  to  consider  the  relation  be- 


FROM    RICARDO    TO   JOHN    STUART    MILL.         jgj 

tween  wages  and  capital ;  influenced  perhaps  by  a  sugges- 
tion of  James  Mill's,  referred  to  a  moment  ago.  It  oc- 
curs to  him  to  inquire  whether  subsistence  should  after 
all  be  classed  as  capital;  but  he  concludes  that  this  is  not 
"a  forced  or  unwarrantable  extension  of  the  meaning  of 
the  term,  capital,"  since  the  capitalist  advances  wages,  as 
he  provides  materials  and  tools,  "for  the  express  purpose 
of  obtaining  a  reproductive  return."*  Thirteen  years 
later,  when  the  doctrines  of  the  classic  school  had  been 
much  more  frequently  worked  over,  and  had  gained  much 
wider  acceptance,  Torrens  wrote  on  Wages  and  Combina- 
tions (1834).  Here  we  have  a  discussion  at  large  of  the 
theory  of  wages,  by  an  able  hand,  and  might  expect  some 
detailed  inquiry  into  the  meaning  and  grounds  of  the 
proposition  that  wages  are  determined  by  the  amount  of 
capital.  But  no  such  inquiry  is  undertaken.  It  is  as- 
sumed without  question  or  argument  that  wages  are  paid 
from  capital;  capital  is  conceived  in  terms  of  food, — so 
many  quarters  of  wheat;  and  the  upshot  of  the  whole 
book  is  that  wages  can  be  little  influenced  by  combina- 
tions, but  can  be  effectively  raised  through  a  check  to  the 
growth  of  numbers  and  through  free  trade  in  grain.  It  is 
significant  that  Torrens,  while  reasoning  that  wages  are 
paid  from  capital,  evidently  does  not  see  herein  any  ground 
for  alleging  that  combinations  of  laborers  can  not  affect 
wages.  On  the  contrary,  he  argues  that  a  universal  com- 
bination might  conceivably  raise  all  wages,  until  they 
reached  the  point  where  the  curtailment  of  profits  would 
check  accumulation  and  reinvestment.  All  this  goes  to 
show  that  the  payment  of  wages  from  capital  did  not  pre- 
sent itself  to  Torrens  as  a  hard-and-fast  barrier  to  efforts 
on  the  part  of  the  laborers  to  better  their  lot;  while,  on 
the  other  hand,  it  did  not  appear  to  him  to  be  of  crucial 

*  See  the  Essay,  pp.  26,  27,  88. 


196 


WAGES   AND   CAPITAL. 


importance,  as  compared  with  the  other  forces  that  affect* 
ed  wages.* 

A  similar  brevity  in  the  treatment  of  the  doctrine  ap- 
pears in  De  Quincey's  Logic  of  Political  Economy  (1844), 
which  is  confessedly  no  more  than  an  exposition  of  Ri- 
cardo's  doctrines.  It  is  chiefly  concerned  with  value,  and 
juggles  with  the  subtleties  of  that  subject  in  De  Quincey's 
most  elaborately  polished  style.  In  the  chapter  on  wages, 
he  proceeds  to  mention  four  determining  factors:  (i)  the 
rate  of  movement  of  population,  (2)  the  rate  of  movement 
of  capital,  (3)  changes  in  the  price  of  necessaries,  (4)  the 
standard  of  living.  Little  is  said  of  capital,  and  it  is  sim- 
ply assumed,  in  direct  acceptance  of  the  usual  compact 
statement,  that  the  ratio  of  capital  to  population  deter- 
mines wages.  De  Quincey's  reasoning  rather  than  reason- 
able mind  brought  him  to  the  curious  conclusion  that  a 
rapid  and  immediate  effect  on  wages  could  be  exercised 
only  by  the  third  of  his  four  factors, — changes  in  the  price 
of  food.  The  other  factors  could  vary  but  slowly  ;  hence, 
by  a  residual  process,  he  was  led  to  the  conclusion  that 
"  the  daily  cost  of  necessaries  alters  sometimes  largely  in 
a  single  day,  and  upon  this,  therefore,  must  be  charged 
the  main  solution  of  those  vicissitudes  in  wages  which  are 
likely  to  occur  within  one  man's  life."  For  the  present 
subject,  De  Quincey's  discussion  deserves  notice  only  as 
yielding  one  further  piece  of  evidence  as  to  the  general 


*  Torrens  laid  it  down  that  there  was  a  minimum  of  wages,  deter- 
mined by  the  laborers'  necessaries  ;  and  a  maximum  of  wages,  determined 
by  the  product.  Between  these  limits,  combinations  of  masters  and  of 
men  might  affect  wage.-,.  Tnis  reminds  one  of  the  mode  of  expounding 
the  theory  of  wages  which  in  later  times  became  current  among  the  Ger- 
man economists,  and  is  still  much  in  vogue  among  them.  Sec  the  Quar- 
terly Journal  of  Economics,  vol.  ix.  p.  16  (October,  1894). 

As  to  the  position  of  Torrens  on  trades-unions  and  the  wages  fund, 
sec  also  what  is  sairl  at  the  clo.^e  of  the  present  chapter. 


FROM    RICARDO    TO   JOHN    STUART    MILL.         JQ/ 

acceptance  of  the  doctrine  as  to  the  payment  of  wages 
from  capital,  and  the  slightness  of  the  emphasis  placed 
on  it. 

We  come  now  to  a  writer  who  at  least  saw  that  there 
was  a  question  here,  and  stopped  to  think  about  it, — Nassau 
W.  Senior.  Professor  Bohm-Bawerk,*  in  his  admirable 
history  of  the  theories  of  capital,  has  pointed  out  the  merit 
of  Senior  in  appreciating  the  need  of  some  independent 
explanation  of  interest  as  a  share  in  distribution  ;  and  an 
equally  able  and  certainly  no  less  critical  historian,  Mr. 
Cannan,  has  similarly  given  him  credit  for  perceiving  the 
inadequacy  of  what  his  predecessors  had  said  on  interest 
and  profit,  f  Praise  of  the  same  sort  can  be  given  to 
Senior's  treatment  of  wages  also.  He  did  not  on  the 
whole  advance  the  discussion  of  wages  as  much  as  that  of 
interest ;  but  he  faced  it  squarely,  and  showed  himself 
awake  to  the  inadequacy  of  the  simple  phrases  and  gen- 
eralizations which  had  been  current  since  the  days  of 
Adam  Smith  and  Ricardo.  Senior,  in  fact,  was  the  most 
acute  critic  of  his  day.  Intellectual  indolence  prevented 
him  from  pushing  his  work  beyond  the  stage  of  criticism. 
He  began  his  contributions  to  economic  literature  with  a 
burst  of  promising  activity  :  lecturing  at  Oxford  on  value, 
on  wages,  on  population,  on  international  trade.  Ricardo's 
peculiar  doctrines  and  phraseology  were  subjected  to  criti- 
cism which  was  severe,  but  in  the  main  just ;  and  Malthus's 
excessive  emphasis" on  the  pressure  of  population  led  to  a 
correspondence  in  which  Malthus  virtually  accepted  Senior's 
version  of  his  own  views.  Perhaps  the  most  successful  con- 
structive part  of  his  work  was  in  the  lectures  on  interna- 


*  B6hm-Ba\vcrk,  Capital  and  Interest,  p.  272. 

f Cannan,  History  of  the  Theories  of  Production  and  Distribution,  p. 
214. 


198 


WAGES   AND   CAPITAL. 


tional  trade  and  the  movement  of  the  precious  metals,  where 
Ricardo's  general  reasoning  on  those  subjects  was  carried 
to  new  and  important  corollaries.  On  wages  he  published 
in  1830  Three  Lectures  on  the  Rate  of  Wages,  which  contain 
almost  everything  that  he  ever  said  on  that  subject.  The 
matter  of  these  lectures,  as  well  as  that  of  the  lectures  on 
other  topics,  was  later  incorporated  in  the  general  essay 
on  political  economy,  amounting  to  a  small  book,  which 
Senior  prepared  in  1836,  in  the  form  of  an  article  for  the 
Encyclopedia  Metropolitana.  With  this  article, — written  pre- 
sumably to  order  and  with  no  great  deliberation, — his  con- 
tributions to  economic  theory  unfortunately  came  to  an 
end.  Other  matters  of  public  and  private  interest  en- 
grossed his  attention,  and  he  published  nothing  more  on 
economic  theory.  His  work  was  thus  never  carried  be- 
yond its  first  stage  of  promise,  and  his  results  were  never 
maturely  developed. 

For  our  purposes,  it  will  suffice  to  consider  the  presen- 
tation of  the  theory  of  wages  in  the  encyclopaedia  article 
on  Political  Economy,  in  which,  as  was  just  remarked, 
Senior  incorporated  substantially  everything  he  said  on 
this  subject  in  the  earlier  essays.  He  begins  by  laying  it 
down  that  wages  depend  proximately  on  the  commodities 
appropriated  to  laborers  as  compared  with  the  number  of 
laborers;  "or,  to  speak  more  concisely,  on  the  extent  of 
the  fund  for  the  maintenance  of  labourers,  compared  with 
the  number  of  labourers  to  be  maintained."  So  much  is 
"  nearly  self-evident."  But  various  current  opinions  are 
inconsistent  with  it,  and  Senior  proceeds  to  examine  at 
length  seven  propositions  which  are  thus  inconsistent  and 
therefore  unsound.  Among  the  doctrines  dissected  in  this 
prolonged  introduction  are  some  that  do  not  touch  the 
present  subject,  and  others  that  have  no  longer  a  living 
interest ;  such  as  the  effects  of  absentee-landlordism,  of 
the  importation  of  foreign  commodities,  of  the  luxurious 


FROM    RICARDO    TO   JOHN    STUART    MILL.        igg 

expenditure  of  the  rich.  But  two  of  the  rejected  propo- 
sitions were  those  most  widely  accepted  of  the  time. 
One,  the  most  familiar  of  all,  was  that  wages  depended  on 
the  ratio  between  capital  and  the  number  of  laborers : 
which  Senior  rejects  because  "  we  know  of  no  definition 
of  that  term  [capital]  which  would  not  include  many 
things  that  are  not  used  by  the  labouring  classes,  and,  if 
our  proposition  be  correct,  no  increase  or  diminution  of 
these  things  can  directly  affect  wages."  The  other  impor- 
tant doctrine  set  aside  by  Senior  was  probably  mentioned 
by  him  because  it  was  attributable,  with  some  show  of 
reason,  to  Adam  Smith,  and  (as  will  presently  be  seen)  to 
Malthus.  It  was  that  wages  depended  on  the  proportion 
between  the  number  of  laborers  and  the  whole  revenue 
of  society.  Neither  Adam  Smith  nor  Malthus,  so  far 
as  they  held  any  such  opinion,  seem  to  have  had  any- 
thing more  in  mind  than  that  wages  tended  to  go  up 
or  down  in  sympathy  with  the  general  movement  of 
the  whole  income  of  the  community.  Irr  any  case, 
Senior  has  no  difficulty  in  showing  that  this  is  no  pre- 
cise statement  of  the  specific  causes  determining  wages 
at  any  one  time. 

It  is  clear  that  Senior  set  out  with  the  intention  of 
examining  in  detail  the  causes  determining  the  real  "fund 
for  the  maintenance  of  labourers,"  and  with  a  strong  sense 
of  the  vagueness  and  inadequacy  of  the  current  generali- 
zations about  the  proportion  of  capital  to  population. 
Doubtless  he  was  led  thus  to  inquire  more  searchingly 
how  wages  at  any  time  were  exactly  fixed,  by  his  com- 
parative freedom  from  the  Malthusian  tinge  of  his  con- 
temporaries. But,  as  he  digressed  needlessly  in  his  intro- 
ductory examination  of  the  opinions  he  rejects,  so  he 
wandered  from  his  subject  when  he  came  to  the  statement 
of  his  own  views  ;  and  before  he  came  to  the  end,  was  so 
weary  of  the  task,  or  uncertain  of  his  ground,  that  he 


200  WAGES  AND   CAPITAL. 

ended  with  little  more  than  that  simple  statement  of  the 
problem  with  which  he  had  begun. 

After  the  introduction,  Senior  returns  to  his  main  sub- 
ject, and  points  out  that  the  fund  for  maintaining  labor- 
ers depends  on  two  things :  -the  general  productiveness  of 
the  laborers  of  the  community  on  the  one  hand,  and  the 
proportion  of  those  laborers,  on  the  other  hand,  who  are 
engaged  in  producing  goods  for  the  use  of  laborers.  This 
is  simple,  but  none  the  less  good  because  it  is  simple. 
While  only  another  statement  of  the  problem,  it  is  a  state- 
ment and  a  beginning  from  a  promising  point  of  view.  It 
brings  out  the  fundamental  fact  that  all  production  comes 
from  labor,  and  brushes  away  any  notion  of  an  independ- 
ent "  productiveness  "  of  land  or  capital.  It  brings  out 
another  important  side  of  the  same  fundamental  fact, — 
namely,  that  income  from  capital  and  land  means  simply 
that  some  laborers  are  working  to  satisfy  the  wants  or 
caprices  of  the  owners  of  these  instruments,  and  that  the 
share  of  the  laborers  in  distribution  depends  primarily  on 
how  many  of  them  are  working  for  the  satisfaction  of  the 
wants  of  their  whole  number.  The  right  statement  of  a 
problem  is  a  good  step  toward  its  solution  ;  and  a  modern 
writer  could  do  worse  than  to  follow  Senior  in  this  mode 
of  approaching  the  subject. 

Fairly  started,  Senior  digresses  again.  He  stops  to 
discuss  the  first  of  the  two  factors  he  has  mentioned, — the 
general  productiveness  of  labor.  The  intelligence  and 
skill  of  the  laborers;  the  quality  of  the  natural  agents; 
the  aid  given  "by  abstinence,  or  to  use  a  more  familiar 
expression,  by  the  use  of  capital  "  ;  the  interference  or 
non-interference  of  government, — are  successively  exam- 
ined. These  are  clearly  questions  of  production,  and  not 
of  distribution  ;  they  distract  the  reader's  attention  from 
the  main  inquiry,  and  one  may  suspect  that  Senior  lingered 
over  these  comparatively  simple  matters  because  of  an  in- 


FROM    RICARDO    TO  JOHN   STUART    MILL.        2QI 

stinctive  hesitation  in  grappling  with  the  more  involved 
problem  of  distribution  proper.  When  at  last  he  reaches 
this,  he  sets  aside  at  once,  as  presenting  no  difficulties,  rent 
and  taxes.  Rent  means  that  some  laborers  produce  com- 
modities for  the  use  of  landlords,  and  "  such  labourers 
may  be  considered  as  existing  only  in  consequence  of  the 
existence  of  natural  agents  of  extraordinary  productive- 
ness."* Taxes  mean  that  some  laborers  work  "for  the 
supply  of  the  consumption  of  the  government  "  :  and  here 
again  Senior  digresses  to  discuss  some  evils  of  taxation, 
holding  off  for  a  while  longer  from  the  crucial  question. 
At  last,  rent  and  taxes  are  left  behind,  somewhat  after  the 
residual  method  which  has  come  so  much  into  vogue  in 
our  own  time.  He  reaches  profits,  and  "the  extent  to 
which  wages  may  be  affected  by  the  employment  of  labour 
to  produce,  instead  of  wages,  things  for  the  use  of  capi- 
talists." 

Unfortunately,  at  this  important  stage,  the  exposition 
becomes  obscure,  and  difficult  to  fellow  or  to  state.  What 
the  capitalists  get,—/.  ^.,  how  many  laborers  work  to  sup- 
ply their  wants, — is  said  to  depend  on  the  rate  of  profits 
and  the  length  of  time  over  which  the  advance  of  capital 
is  spread.  But  the  rate  of  profits  is  surely  the  consequence 


*  Senior  considered  rent  no  deduction  from  wages,  and  no  burden  on 
the  laborers,  because  rent  was  the  consequence  of  the  unusual  productive- 
ness of  certain  land.  "  The  labourers  who  are  employed  for  the  benefit 
of  the  owners  of  natural  agents  may  be  in  general  considered  a  separate 
class,  not  withdrawn  from  the  general  body,  but  added  to  it  by  the  exist- 
ence of  those  natural  agents."  It  is  a  natural  corollary  from  the  classic 
theory  of  rent  to  say,  as  Senior  here  does,  that  the  laborers  who  work  for 
the  landowners  do  not  diminish  real  wages  ;  but  might  not  they  add  to 
real  wages,  by  working  to  supply  the  needs  of  other  laborers,  instead  of 
working  to  supply  the  landlords  ?  Both  as  to  rent  and  taxes.  Senior 
failed  to  follow  the  line  of  reasoning  which  he  had  marked  out  at  the 
beginning. 


202  WAGES   AND   CAPITAL. 

rather  than  the  cause  of  the  share  of  the  capitalist  in  the 
result  of  production  ;  or  rather  it  is  the  same  phenomenon 
defined  in  different  terms.  Senior  seems  to  fall  into  a 
vicious  circle,  and  to  get  no  farther  than  to  state  his  prob- 
lem in  another  way.  He  illustrates  his  principle  by  sup- 
posititious figures,  in  which  the  shares  of  the  capitalists 
and  the  laborers  are  stated  in  terms  of  the  product  of  so 
many  days'  labor.  But,  in  fine,  we  get  nothing  that  clears 
away  the  real  difficulties.  "  The  rate  of  profit  depends  on 
the  previous  conduct  of  the  labourers  and  capitalists  of 
the  country," — which  probably  expresses  an  intuition  that 
at  any  given  time  distribution,  and  especially  wages,  must 
be  predetermined  by  forces  that  have  operated  mainly  in 
the  past.  But  exactly  how  the  previous  conduct  either  of 
laborers  or  of  capitalists  affects  the  situation,  is  not  lucidly 
set  forth.  We  might  expect  to  find  here  some  reference 
to  the  mode  in  which  capitalists  have  been  induced  to 
'•abstain,"  and  to  the  manner  in  which  their  reward  for 
"  abstinence," — so  much  discussed  by  Senior  in  earlier 
passages  of  this  same  essay, — is  worked  out;  but  we 
hear  nothing  of  it.  Almost  imperceptibly,  Senior  drifts 
back  into  the  familiar  mode  of  approaching  the  question. 
Capital  is  stated  in  terms  of  so  much  food  ;  and  the  in- 
come of  the  laborers  is  made  to  depend  at  any  given  time 
on  the  quantity  of  food  as  compared  with  the  number  of 
the  laborers.  He  forgets,  apparently,  what  he  said  at  the 
outset,  of  wages  not  depending  on  the  ratio  between  capi- 
tal and  population.  It  is  true  that  he  professes  to  ex- 
amine only  the  simplest  state  of  society,  in  which  all  capi- 
tal may  be  food;  but  he  examines  no  other;  and  he  does 
not  introduce  at  the  close  those  qualifications  which  ap- 
pear in  a  complicated  society  and  which  he  clearly  had  in 
mind  when  he  began. 

It  may  be  suspected   that  if  Senior,  after  writing  this 
statement  of  the  theory  of   distribution,  had  laid  it  aside, 


FROM    RICARDO    TO   JOHN    STUART    MILL.        203 

and  re-examined  it  after  the  lapse  of  two  or  three  years, 
he  would  not  have  given  it  to  the  public  in  its  present 
form.  How  far  a  riper  consideration  would  have  affected 
his  views,  it  is  idle  to  speculate.  Senior  had  good  sense, 
a  clear  and  independent  head,  the  easy  style  of  a  man  of 
letters:  a  more  mature  and  deliberate  piece  of  work  from 
his  hand  might  have  profoundly  affected  the  subsequent 
course  of  thought.  As  it  was,  his  discussion  of  wages 
served  on  the  whole  to  keep  the  traditional  statement  \vhere 
it  was.  When  he  came  at  close  quarters  with  the  subject, 
he  followed  Ricardo  in  analyzing  capital  into  advances  to 
laborers,  or  food  ;  he  laid  stress  on  the  proximate  depend- 
ence of  wages  on  the  "  fund  for  the  maintenance  of  labour- 
ers "  as  compared  with  the  number  of  laborers  ;  and,  while 
he  criticised  Malthus,  he  did  little  to  distract  the  attention 
of  economists  from  the  standard  of  living  as  the  one  great 
factor  to  be  insisted  on  in  the  presentation  of  the  wages 
question. 

We  may  turn  now  to  some  of  the  writers  who  dissented 
more  or  less  from  the  general  theories  of  the  reigning 
school.  On  the  wages  fund  doctrine,  in  the  form  in  which 
it  was  then  commonly  stated,  we  shall  find  their  dissent 
neither  important  in  substance  nor  strong  in  emphasis. 

Malthus's  attitude  in  the  Essay  o?i  Population  has  been 
already  described  :  he  had  shown  some  disposition  to  dif- 
fer with  Adam  Smith,  and  had  attempted  to  give  his  own 
analysis  of  "  the  funds  for  the  maintenance  of  labour."  In 
the  books  and  pamphlets  which  he  published  in  later  years, 
after  Ricardo  had  turned  economic  thought  so  largely  into 
new  channels,  he  attempted  a  modification  of  the  doctrine 
that  the  demand  for  labor  came  from  capital,  which  fol- 
lowed substantially  the  lines  of  his  first  modest  difference 
with  Adam  Smith. 

Malthus's  opposition  to  Ricardo  and  his  followers  cen- 


2O4 


WAGES     AND   CAPITAL. 


tered  about  his  insistence  on  demand  and  supply  as  the 
primary  forces  determining  exchange  and  distribution. 
Hence,  in  regard  to  wages,  he  laid  stress  on  the  impor- 
tance of  the  proximate  demand  for  labor,  and  protested 
against  the  emphasis  on  a  "  natural  "  rate  of  wages  deter- 
mined by  the  habitual  subsistence  of  the  laborer.  Mal- 
thus  himself  was  mainly  responsible  for  the  almost  exclusive 
attention  which  the  Ricardian  school  gave  to  "  natural  " 
wages;  and  it  is  part  of  the  irony  of  fate  that  he  found  it 
necessary  to  protest  against  doctrines  which  were  largely 
of  his  own  making.  He  insisted  on  the  importance  of 
supply  and  demand,  as  they  worked  at  any  given  time,  in 
the  determination  of  profits,  protesting  against  Ricardo's 
teaching  that  profits  depended  on  the  price  of  food  ;  and 
similarly  he  insisted  on  the  importance  of  the  proximate 
demand  for  labor  in  determining  wages. 

As  to  the  nature  of  this  direct  demand,  however,  and 
the  causes  which  made  it  large  or  small  at  any  given  time, 
Malthus  after  all  had  not  much  to  say.  In  the  first  edi- 
tion of  the  Principles  of  Political  Economy  (1820)  he  begins 
by  saying  that  wages  depend  primarily  on  demand  and 
supply,  and  that  "  what  may  be  called  cost  of  production 
of  labour  only  influences  wages  as  it  regulates  the  supply 
of  labour."*  Demand,  thereafter,  he  speaks  of  in  terms 
that  vary  much  :  sometimes  as  coming  from  the  "capital  " 
of  the  community,  sometimes  from  the  "  capital  and  reve- 
nue," sometimes  from  the  "  resources,"  sometimes  from 
the  "general  value  of  the  produce."  Apparently  he  did 
not  at  this  time  think  it  of  much  moment  to  consider 
and  define  the  demand  for  labor  with  any  painstaking  ac- 
curacy. In  the  second  edition  (1836),  he  changed  his  gen- 
eral introductory  statement  in  a  manner  indicating  that  he 
had  given  more  specific  attention  to  this  part  of  the  theory 

*  Political  Economy,  ch.  iv,  section  i. 


FROM    RICARDO    TO   JOHN    STUART    MILL.        205 

of  distribution.  It  may  be  guessed  that  Senior's  discus- 
sion led  him  to  stop  to  think  more  carefully  about  it;  be- 
yond question,  the  steady  controversy  which  he  had  carried 
on,  since  the  appearance  of  the  first  edition,  with  Ricardo 
and  his  followers,  led  him  to  define  his  views  more  sharply 
in  this  second  edition.  The  most  important  passage  in 
the  later  edition  may  be  quoted  in  full : 

"  It  has  been  generally  considered  that  the  demand  for  labour  is 
proportioned  only  to  the  circulating,  not  to  the  fixed  capital  of  a 
country.  But  in  reality  the  demand  for  labour  is  not  proportioned 
to  the  increase  of  capital  in  any  shape  ;  nor  even,  as  I  once  thought, 
to  the  increase  of  the  exchangeable  value  of  the  whole  annual  pro- 
duce. It  is  proportioned  only,  as  above  stated,  to  the  increase  in 
the  quantity  and  value  of  the  funds  which  are  actually  employed  in 
the  maintenance  of  labour. 

"  These  funds  consist  in  the  necessaries  of  life,  or  the  means  of 
commanding  the  food,  clothing,  lodging,  and  firing  of  the  labouring 
classes  of  society," — * 

and  then  Malthus  goes  on  to  point  out  that  a  large  ex- 
penditure of  "neat  surplus  "in  hiring  "menial  servants, 
soldiers,  and  sailors  "  will  add  to  the  demand  for  labor 
without  an  increase  of  capital.  Evidently  he  was  here  on 
very  much  the  same  ground  that  he  had  taken  in  the  Es- 
say on  Population  :  we  must  consider  "  the  increase  in  the 
funds  specifically  destined  for  the  maintenance  of  labor, 
instead  either  of  the  increase  of  wealth,  or  the  increase  of 
capital,  or  the  increase  of  the  exchangeable  value  of  the 
whole  produce."  f 

Yet  Malthus  never  got  even  as  far  as  Senior  did  in  the 
inquiry  what  precise  relation  these  funds  bore  to  the  capi- 
tal, or  the  wealth,  or  the  exchangeable  produce  of  the 

*  Political  Economy,  2d  edition,  p.  234. 

f  This  is  the  summary  given  at  p.  260  of  the  second  edition  of  the 
Political  Economy,  at  the  close  of  the  chapter  on  Wages. 


2O6  WAGES   AND   CAPITAL. 

country.  More  than  this :  when  discussing  other  related 
subjects,  and  more  particularly  the  closely  related  one  of 
profits,  he  fell  into  the  traditional  way  of  speaking  of 
capital  simply  as  constituting  the  demand  for  labor,  and  of 
the  relative  advance  of  capital  and  population  as  determin- 
ing profits.*  His  insistence  on  the  "  funds  "  rather  than 
"  capital  "  as  making  and  measuring  the  demand  for  labor 
arose,  in  fact,  from  a  desire  to  influence  other  parts  of 
economic  theory  than  those  connected  with  the  wages 
fund  doctrine  proper.  He  meant  to  protest  against  the 
notion  that  "  natural  "  wages,  determined  by  cost  of  pro- 
duction, told  virtually  the  whole  story.  Further,  he  had 
in  mind  the  question  how  far  a  market  for  an  increasing 
supply  of  commodities  could  be  found  among  laborers,  as 
capital  accumulated  and  profits  tended  to  decline.  All  of 
Malthus's  speculations  in  later  years  were  colored  by  his 
adherence  to  the  theory  of  gluts,  or  general  over-invest- 
ment and  over-production.  His  views  on  gluts  never 
gained  acceptance,  and  on  the  whole  did  not  deserve  to  ; 
and  this  aided  to  prevent  his  attempt  at  a  re-statement  of 
the  immediate  demand  for  labor  from  making  much  im- 
pression. In  any  case,  Malthus  never  questioned  that  com- 
modities turned  over  to  laborers  by  employers  engaged  in 
production  were  capital;  on  the  contrary,  one  of  the  many 
points  on  which  he  quarrelled  with  M'Culloch  was  in  in- 


*  In  the  discussion  of  profits  in  the  first  edition  occurs  this  passage, 
which  indicates  sufficiently  how  far  his  reflections  had  carried  him  in 
1820:  "I  have  stated  in  a  former  chapter  that  the  demand  for  labour 
does  not  depend  on  capital  alone,  but  on  revenue  and  capital  taken  to- 
gether, or  the  value  of  the  whole  produce  ;  but  to  illustrate  the  present 
supposition  [the  italics  are  Malthus's:  the  supposition  is  that  capital  is 
abundant]  it  is  only  necessary  to  consider  capital  and  labour." — Ch.  v, 
section  ii  (p.  234,  note,  in  the  American  reprint  of  1821).  So  in  the 
second  edition  (p.  277)  :  "As  capital  and  produce  increased  faster  than 
labour,  the  profits  of  capital  would  fall"  ;  and  so  on. 


FROM    RICARDO    TO   JOHN    STUART    MILL.        207 

sisting  that  food  became  capital  simply  by  virtue  of  being 
in  fact  turned  over  to  laborers.*  This  fundamental  part 
of  the  current  doctrine  being  accepted,  it  was  natural  that 
corrections  in  the  precise  statement  of  the  total  demand 
for  wages,  applied  as  they  were  chiefly  in  connection  with 
unpopular  doctrines  like  that  on  gluts,  should  have  failed 
to  affect  in  any  visible  way  writers  of  that  day  or  of  later 
days. 

Another  writer  may  here  be  briefly  mentioned  :  Thomas 
Chalmers,  who  joined  with  Malthus  in  asserting  that  some- 
thing like  a  general  glut  was  possible,  and  so  dissented 
from  the  dominant  school  on  at  least  one  fundamental 
doctrine.  Unlike  Malthus,  Chalmers,  in  his  Political 
Economy  (1832),  always  speaks  of  "capital  "  simply  as  the 
source  whence  wages  are  paid.  Capital,  in  Ricardo's 
fashion,  is  treated  as  resolvable  ultimately  into  a  succes- 
sion of  advances  to  laborers  :  the  point  on  which  Chalmers 
dissented  being  the  possibility  of  indefinitely  increasing 
those  advances  without  annihilating  profits.  In  his  rea- 
soning on  the  ultimate  consequence  of  investment,  and  the 
ultimate  source  whence  capitalists  were  recouped,  Chal- 
mers suggested,  though  very  briefly,  a  doctrine  which  later 
was  made  much  of  by  German  economists, — that  ulti- 
mately wages  were  derived  from  what  was  paid  for  the 
product  by  consumers  and  so  from  the  "  replacing  power 
in  the  hands  of  consumers."  f  Of  this  turn  in  the  devel- 
opment of  the  theory  of  wages  more  will  be  said  in  a  later 
chapter.  In  the  main  Chalmers,  even  more  than  Malthus, 
retained  and  even  reinforced  the  current  doctrines  as  to 
the  immediate  determination  of  wages  by  capital,  and 
made  no  impression  on  the  course  of  thought  on  wages 
and  the  wa^es  fund. 


*  See  Malthus's  Definitions  in  Political  Economy  (1827),  p.  85. 
f  Political  Economy,  vol.  i,  p.  98. 

15 


2o8  WAGES   AND   CAPITAL. 

A  much  more  vigorous  protest  than  came  from  either 
Senior  or  Malthus  or  Chalmers,  against  the  general  doc- 
trines in  vogue,  was  made  by  Richard  Jones.  Jones  was 
an  able  and  scholarly  thinker,  with  views  broadened  by  a 
wide  knowledge  of  history  and  an  appreciation  of  the  les- 
sons of  history.  His  attitude  on  the  wages  fund  doctrine, 
as  the  doctrine  stood  at  that  date,  is  significant.  He  ad- 
mitted that  it  was  true  hie  et  nunc,  but  insisted  that  in  the 
sweep  of  history  it  had  but  very  limited  application.  His 
views  on  our  subject  appear  in  the  Literary  Remains,  con- 
sisting of  Lectures  and  Tracts  on  Political  Economy,  pub- 
lished in  1859,  after  his  death.  At  what  date  these  frag- 
ments were  composed  does  not  appear;  but  from  passages 
in  his  Essay  on  Rent,  published  in  1831,  it  is  clear  that  he 
had  matured  his  opinions  in  all  essentials  as  early  as  that 
date.* 

Jones  laid  stress  on  the  fact  that,  taking  the  world 
over,  only  a  small  proportion  of  laborers  were  paid  out  of 
capital.  He  divided  laborers  into  three  classes:  (i)  un- 
hired  laborers  tilling  the  ground  as  peasant  proprietors  or 
serfs;  (2)  laborers  paid  directly  out  of  "revenue"  by 
those  employing  them,  such  as  servants  in  modern  times 
and  retainers  in  the  Middle  Ages;  (3)  laborers  hired  by 
capitalists  and  paid  by  advances  from  them.  He  main- 
tained that  the  great  bulk  of  laborers  in  the  world  be- 
longed to  the  first  class,  and  were  not  paid  out  of  capital. 
The  commodities  on  which  they  lived  were  a  fund  for 
"immediate  consumption,  constituting  part  of  the  revenue 
of  the  country."  The  second  class  were  also  paid  out  of 
"revenue,"  and  not  out  of  capital.  In  a  society  like  that 


*  See  p.  xxvi  of  the  Preface  to  the  Essay  on  Kent,  where  there  is  a 
clear  intimation  of  the  distinctions  amplified  in  the  later  volume.  See 
also  his  Introductory  Lecture  on  Political  Economy,  and  Syllabus  of  a 
Course  of  Lectures  on  Wages  (1833),  where  the  same  distinctions  are  sum- 
marily stated,  pp.  45-52. 


FROM    RICARDO    TO   JOHN    STUART    MILL.        2OQ 

of  the  Middle  Ages,  this  class  would  include  not  only  the 
great  numbers  of  feudal  retainers,  but  many  artificers  en- 
gaged directly  by  those  wanting  their  services.  As  to  the 
third  class,  England  was  the  only  country  in  which  the 
bulk  of  the  laborers  belonged  to  it ;  and  even  in  the  Eng- 
land of  the  author's  day,  the  members  of  the  second  class 
were  "  a  body  not  unimportant." 

Here  we  have  on  the  one  hand  an  echo  of  Adam 
Smith's  distinction  between  capital  and  revenue,  on  the 
other  hand  a  large-minded  view  of  the  great  variations  in 
the  machinery  of  production  and  distribution  among  dif- 
ferent communities  and  in  different  times.  The  differ- 
ences which  he  pointed  out  between  modern  advanced 
communities,  and  older  communities  having  a  fundamen- 
tally different  organization  of  industry,  deserved  much 
more  attention  than  they  received.  The  F^nglish  econo- 
mists of  that  time  had  a  singularly  insular  horizon.  They 
regarded  only  the  phenomena  that  were  before  their  eyes 
in  their  own  country,  and  generalized  from  them  with  a 
strange  disregard  of  the  absence  elsewhere  of  the  condi- 
tions on  which  their  generalizations  rested.  Jones's  pro- 
tests against  the  undiscriminating  rashness  with  which 
they  applied  their  doctrines  were  not  heeded;  yet  they 
deserve,  as  they  have  received,  high  praise  for  the  his- 
toric sense  which  they  evince.* 

Nevertheless,  as  to  the  third  class  of  laborers,  and  so 
as  to  the  conditions  of  modern  societies,  Jones  does  not 
question  the  doctrines  of  the  day.  Such  laborers  are  paid 
out  of  capital,  and  their  wages  depend  on  the  amount  of 
capital.  "  The  whole  fund  from  which  they  are  paid  is  a 


*  Dr.  Ingram,  in  his  History  of  Political  Economy,  pp.  142-145,  has 
justly  pointed  out  Jones's  merit,  and  the  important  place  he  should  have 
among  the  early  thinkers  who  used  a  really  historical  and  comparative 
method. 


2io  WAGES   AND   CAPITAL. 

fund  which  has  to  be  saved,  which  goes  through  a  process 
of  accumulation  with  a  view  to  profit."  As  their  numbers 
increase,  "it  is  necessary  for  their  continuous  prosperity 
that  the  community  should  save  and  accumulate  capital 
at  least  as  fast  as  they  are  multiplying  their  numbers."* 
The  wages  of  such  laborers  depend  on  the  relative  growth 
of  capital  and  population.  This  is  laid  down  in  unques- 
tioning acceptance,  as  to  modern  advanced  societies,  of 
the  doctrine  then  current. 

Jones  gave  little  space  to  his  third  class  of  laborers, 
hired  by  capital.  In  the  fragments,  attention  is  given 
chiefly  to  the  other  two  classes,  which  his  contemporaries 
had  so  completely  left  out  of  sight.  He  thus  questions 
rather  the  scope  of  the  classic  doctrine,  than  its  validity 
where  the  assumed  conditions  are  to  be  found.  He  main- 
tains, indeed,  that  the  organization  of  industry  by  which 
laborers  are  hired  by  capitalists,  represents  an  advance  in 
the  methods  of  production.  The  laborers  work  more  con- 
tinuously and  efficiently  :  the  capitalists  plan  and  develop 
inventions  and  improvements.  In  fact,  there  is  a  tinge 
of  optimism,  unexpected  in  a  writer  of  his  stamp,  in  the 
reasoning  as  to  the  advantages  of  the  capitalist  system 
for  the  laborer.  It  brings  greater  competition  for  his 
services,  and  "  nothing  can  prevent  the  whole  sum  paid  as 
wages  being  dictated  by  the  wants  and  demands  of  the 
whole  body  of  capitalists  made  more  pressing  and  eager 
by  each  successive  accumulation  of  capital.  This  compe- 
tition is  the  workman's  real  safeguard, — he  interferes  with 
it,  ordinarily,  much  to  his  disadvantage."  f 


*  Literary  Remains,  p.  173.     Cf.  also  p.  460. 

\  Ibid.,  p.  45q. — In  another  passage  (p.  453),  Jones  touched  on  the 
doctrine,  which  Chalmers  had  also  suggested,  that  the  "real  source  of  the 
workmen's  subsistence  "  was  in  the  "  revenues  of  the  surrounding  custom- 
ers." We  have  here  another  hint  (no  more  than  a  hint)  of  that  teaching 


FROM    RICARDO    TO   JOHN    STUART    MILL.        2II 

In  all  the  discussions  of  this  period,  the  mode  in  which 
capital  served  to  reward  labor  was  treated  in  general 
terms  and  with  a  loose  touch.  Hence  it  is  not  often  that 
we  find  any  intimation  on  a  point  which  in  a  later  period 
became  of  prime  importance, — the  rigidity  of  the  funds 
"  destined  "  for  the  maintenance  of  labor.  The  point,  in 
fact,  was  hardly  ever  raised  in  terms.  Such  opinions  as 
were  entertained  in  regard  to  it  are  to  be  gathered  from 
what  was  said  on  other  aspects  of  the  question,  and  more 
particularly  on  the  possible  effects  of  combinations  and 
strikes  among  laborers.  No  aspect  of  the  proposition 
that  wages  are  paid  from  capital  has  caused  it  to  be  treat- 
ed with  greater  contumely  than  the  corollary,  supposed  to 
flow  from  it,  that  trades-unions  and  combinations  can  no.t 
secure  any  rise  in  wages.  What  was  said  on  this  topic  by 
the  writers  of  the  generation  here  considered  is  in  itself 
of  interest,  and  at  the  same  time  gives  some  clue  to  their 
views  on  the  fixity  or  elasticity  of  the  wages  fund. 

It  has  already  been  seen*  that  one  of  the  prominent 
members  of  the  Ricardian  school,  Colonel  Torrens,  writ- 
ing specifically  On  Wages  and  Combinations,  gives  no  inti- 
mation of  any  rigid  barrier  mocking  the  efforts  of  laborers 
to  secure  better  terms.  In  that  essay,  the  soldier-scholar 
admits  that  a  universal  combination  of  laborers  might 
secure  an  immediate  general  rise  of  wages,  provided  that 
profits  were  not  at  the  minimum  ;  and  he  does  not  con- 
ceive, profits  as  necessarily  at  the  minimum,  even  though 
he  agrees  that  high  profits  will  stimulate  accumulation, 
and  so  raise  wages  eventually  at  the  expense  of  profits. 
In  reasoning  of  this  sort,  wages  are  assumed  as  a  matter 
of  course  to  depend  on  capital :  but  capital  does  not  ap- 


as  to  the  bearing  of  consumers'  income  on  wages  and   capital  which  the 
German  economists  later  developed  so  fully. 
*  See  above  pp.  194-195. 


212  WAGES   AND   CAPITAL. 

pear  as  a  fund  unalterable  at  any  given  time,  predetermin- 
ing wages  once  for  all.  Similarly,  the  reviewer  of  Torrens 
in  the  journal  in  which  the  classic  writers  had  full  sway, 
the  Edinburgh  Review*  evinces  indeed  a  spirit  sufficiently 
out  of  sympathy  with  workmen  and  their  unions;  but  at 
all  events  does  not  fling  the  wages  fund  at  their  heads. 
The  familiar  remarks  about  the  certain  failure  of  strikes, 
the  committees  who  spend  the  union  funds  on  liquor,  the 
slack  trade  and  diminished  employment  which  must 
neutralize  any  temporary  success, — these  appear  in  char- 
acteristic form.  But  no  law  of  political  economy  in  the 
way  of  an  unalterable  wages  fund  is  propounded  for  the 
confusion  of  the  unionists. 

Much  the  same  may  be  said  of  M'Culloch.  That  arch- 
sinner  among  the  classic  writers  has  something  to  say  of 
trade-unions  and  combinations  in  the  two  editions  of  his 
Essay  on  Wages;  and  the  spirit  of  it  is  by  no  means  of 
that  intolerant  sort  which  the  traditions  as  to  the  tenets 
of  his  school  would  lead  us  to  expect.  In  the  first  edi- 
tion, of  1825,  he  defends  unhesitatingly  the  repeal,  in 
the  year  preceding,  of  the  act  prohibiting  combinations. 
While  scolding  laborers  freely  for  every  individual  strike 
he  mentions,  he  yet  admits  that  combinations  may  some- 
times raise  the  wages  of  some  workmen  to  their  "  proper  " 
rate.  Of  any  difficulties  in  the  way  of  a  general  rise  in 
wages  he  has  nothing  to  say.f  That  question  is  taken  up 
more  specifically  in  the  second  edition  of  the  essay  (1854), 
—an  edition  given  to  the  public  immediately  after  the 
great  strikes  of  1853,  and  largely  with  the  purpose  of 
spreading  among  workmen  themselves  the  economic  views 


*  Vol.  lix  (July,  1834),  pp.  341,  342,  348, 


•f  Essay  on  Wages,  1st  edition,  pp.  186,  iSS. — There  is  virtually  noth- 


on  combinations  and  -trikes  in  the  various  editions  of  M'Culloch's 


Political  Economv, 


FROM    RICARDO    TO    JOHN    STUART    MILL. 


213 


which  the  author  thought  pertinent  to  the  events  of  the 
day.  Here  the  case  of  a  general  combination  and  strike 
is  considered.  M'Culloch  predicts  the  failure  of  any  such 
move;  not,  however,  because  it  is  inherently  doomed  by 
economic  law,  but  because  the  masters  are  likely  to  out- 
last the  men.  He  concludes  that  strikes  to  force  up  wages 
are  likely  to  result  in  the  emigration  of  capital  to  foreign 
parts :  an  effect  which  presupposes  that  there  was  at  least 
a  temporary  success  in  bringing  wages  up.*  All  this,  to 
repeat,  suggests  nothing  rigid  or  inflexible  in  the  capital 
from  which  alone  M'Culloch  and  his  fellows  maintained 
that  wages  could  be  paid,  and  shows  once  more  how  vague 
were  their  views  as  to  the  precise  meaning  and  limits  of 
the  wages  fund. 

The  explanation  of  this  general  vagueness  of  state- 
ment and  unexpected  silence  on  crucial  points  in  the  ap- 
plication of  the  doctrine,  has  already  been  indicated.  The 
main  interest  of  the  writers  of  the  period  was  in  other  sub- 
jects. They  believed  that  the  chief  means  of  bettering  the 
condition  of  mankind  was  on  the  one  hand  by  the  mainte- 
nance of  a  high  standard  of  living,  on  the  other  hand  by 
improvements  in  the  machinery  of  production,  more  espe- 
cially by  the  relaxation  of  all  restrictions  on  domestic 
trade,  still  more  of  those  on  foreign  trade.  Given  unfet- 
tered play  to  self-interest  and  competition  (the  mainsprings 
of  individual  and  national  prosperity)  and  economic  diffi- 
culties would  disappear.  The  only  serious  danger  under 
such  conditions  lay  in  the  possibility, — in  the  minds  of 
many  of  these  men  a  probability, — that  population  would 
increase  so  fast  as  to  swallow  up  all  gain  from  increased 
production.  Hence  the  ready  statement  of  the  causes  on 
which  wages  depended  in  a  form  which  made  it  easy  to 
pass  at  once  to  the  all-important  aspect  of  the  question  : 

*  Essay  on  Wages,  2cl  ediiion,  pp.  84,  86. 


214 


WAGES   AND   CAPITAL. 


the  necessity  of  restraint  on  the  advance  of  popula- 
tion. 

The  main  results  of  this  account  of  the  stage  which 
the  wages  fund  doctrine  reached  between  1815  and  1848 
may  now  be  summarized.  The  writers  of  the  period  have 
been  considered  at  length,  perhaps  at  wearisome  length, 
because  it  is  the  period  during  which  the  doctrine  was 
most  widely  accepted  and  might  be  expected  to  be  most 
explicitly  stated.  In  fact,  however,  we  find  it  to  be  stated 
usually  in  the  vaguest  terms,  and  with  little  emphasis. 
Wages  are  paid  from  capital,  and  depend  on  the  amount 
of  capital  compared  with  the  number  of  laborers  :  so  much 
is  laid  down  in  general  terms,  and  then,  as  a  rule,  the 
writers  pass  at  once  to  other  subjects.  The  reasons  which 
Adam  Smith  and  his  immediate  successors  gave,  to  explain 
and  prove  the  dependence  of  laborers  on  capital,  are  not 
thought  to  need  attention.  Ricardo  had  set  the  example 
of  assuming,  as  one  of  the  things  settled  by  Adam  Smith, 
that  wages  of  "productive"  laborers  are  paid  from  capi- 
tal. The  same  tacit  assumption  was  made  by  most  of  his 
successors.  Some  writers,  indeed,  like  Senior  and  Mal- 
thus,  paused  to  analyze  more  in  detail  the  nature  of  the 
demand  for  labor;  but  neither  they,  nor  other  writers  who 
might  dissent  from  the  current  doctrines,  denied  that  capi- 
tal constituted  a  demand  for  labor;  and  not  only  a  de- 
mand, but  the  most  important,  even  if  not  the  sole,  con- 
stituent part  of  the  total  demand.  Jones,  the  most  radical 
among  the  critics  of  the  reigning  school,  denied  that  wages 
depended  on  capital  universally  ;  but  that  the  dependence 
existed  in  modern  advanced  communities,  he  assumed  as 
unhesitatingly  as  M'Culloch. 

While  the  general  doctrine  was  thus  accepted  almost 
without  qualification,  it  was  also  stated  in  terms  not  likely 
to  provoke  opposition.  The  sting  of  the  doctrine,  as  it 
was  attacked  and  reprobated  in  later  days,  was  in  the 


FROM    RICARDO    TO  JOHN   STUART    MILL.        215 

supposed  predetermination  and  rigidity  of  the  wages 
fund  :  in  the  obstacles  which  it  was  supposed  to  present 
against  efforts  at  immediate  improvement  in  the  condition 
of  laborers.  Whatever  may  have  been  the  case  in  later 
years,  there  is  no  evidence  that  fixity  or  rigidity  in  the 
wages  fund  was  prominent  in  the  minds  of  the  writers  of 
the  period  considered  in  the  present  chapter.  Such  evi- 
dence as  we  get  on  this  point,  derived  mainly  from  their 
discussion  of  combinations  and  strikes,  is  in  the  negative. 
The  wages  fund  is  there  certainly  not  described  as  rigid, 
and  by  inference  is  treated  as  elastic. 


CHAPTER   XI. 

JOHN    STUART    MILL. 

WITH  the  younger  Mill's  Principles  of  Political  Econ- 
omy we  may  advantageously  begin  a  fresh  chapter.  Not 
that  the  book  can  be  said  by  itself  to  have  made  any  sub- 
stantial change  in  the  discussion  of  the  wages  fund.  On 
this  topic,  as  on  most  others  of  economic  theory  in  its 
narrower  sense,  Mill  hardly  did  more  than  to  set  forth  and 
codify  the  accepted  views  of  his  time.  But  his  exposition 
dominated  economic  thought  for  near  a  generation,  and, 
moreover,  gave  the  impetus  both  to  the  first  bold  attack 
on  the  wages  fund  doctrine  and  to  the  first  deliberate  at- 
tempt at  its  rehabilitation.  As  an  indication  of  the  stage 
at  which  the  doctrine  stood  for  many  years,  and  as  the 
point  of  departure  for  the  later  movement,  Mill's  position 
then  deserves  an  attentive  examination.  For  the  present, 
it  will  be  convenient  to  limit  the  examination  to  Mill's 
views  as  they  were  formed  at  the  time  when  he  published 
the  Principles  of  Political  Economy  \  leaving  for  later  con- 
sideration, in  connection  with  the  next  stage  in  the  discus- 
sion, his  recantation  of  the  doctrine. 

What  Mill's  views  were,  and  how  he  reached  them  and 
presented  them,  is  to  be  gathered  from  various  passages 
in  the  Political  Economy  :  not  only  from  the  chapters  deal- 
ing directly  with  wages,  but  from  those  on  the  place  of 
labor  in  production,  on  capital,  on  changes  in  distribution 
under  the  influence  of  progress,  and  on  other  related  topics. 


JOHN   STUART    MILL.  21? 

These  passages  are  not  always  consistent.  They  give  un- 
mistakable evidence  of  Mill's  failure  to  revise  his  book  in 
cool  blood,  and  so  to  give  coherence  to  the  scattered  dis- 
cussions of  the  same  subject  as  it  was  approached  from 
different  points  of  view.  The  two  large  volumes  were 
composed  in  a  surprisingly  short  space  of  time,— less  than 
two  years.*  In  that  regard  they  constitute  a  remarkable 
intellectual  feat;  but  they  suffered  from  the  hasty  compo- 
sition. It  is  true  that  Mill's  mind  had  been  busy  with 
economic  topics  almost  from  childhood,  and  that  on  some 
subjects  he  had  written  out  in  early  manhood  much  that 
he  incorporated  in  the  Principles.  Yet  he  had  never  at- 
tempted an  exposition  of  the  subject  at  large;  and  when 
he  came  to  dash  it  off  in  the  evenings  of  two  busy  years, 
he  could  not  bring  the  whole  into  consistent  unity. 

It  might  be  expected  that  the  dependence  of  wages  on 
capital  would  be  set  forth  by  a  writer  like  Mill,  deliber- 
ately engaged  on  an  exposition  of  economic  doctrine  at 
large,  in  connection  with  the  element  of  time  in  produc- 
tion. The  fact  that  the  operations  of  production  are 
spread  over  a  long  stretch  of  time,  though  it  underlies 
the  whole  classic  theory  of  the  relation  of  wages  to  capi- 
tal, had  rarely  received,  since  the  days  of  Adam  Smith, 
more  than  passing  attention.  Mill  is  not  much  more  ex- 
plicit than  his  predecessors.  In  one  place  and  another,  he 


*  "  The  Political  Economy  was  commenced  in  the  autumn  of  1845, 
and  was  ready  for  the  press  before  the  end  of  1847.  In  this  period  of 
little  more  than  t\vo  years  there  was  an  interval  of  six  months,  during 
which  the  work  was  laid  aside,  while  I  was  writing  articles  in  the  Morn- 
ing Chronicle  urging  the  formation  of  peasant  properties  on  the  waste 
lands  of  Ireland." — Mill's  Autobiography,  p.  235. 

Dr.  Ingram  remarks  with  justice  in  his  History  of  Political  Economy 
(p.  150)  that  Mill  never  succeeded  in  fusing  his  economic  theories  with 
his  social  and  philosophic  views.  It  is  equally  true  that  he  never  suc- 
ceeded in  entirely  welding  together  his  strictly  economic  views. 


2i8  WAGES   AND   CAPITAL. 

presents  the  fundamental  point  with  sufficient  clearness; 
but  usually  as  an  incident  to  the  discussion  of  other  mat- 
ters. At  the  very  outset,  in  describing  labor  as  an  agent 
in  production,  he  remarks  that  the  labor  "  employed  in 
producing  subsistence,  to  maintain  the  labourers  while  they 
are  engaged  in  production,  requires  particular  notice. 
This  previous  employment  of  labour  is  an  indispensable 
condition  to  every  productive  operation,  on  any  other  than 
the  very  smallest  scale.  .  .  .  Productive  operations  re- 
quire to  be  continued  a  certain  time,  before  their  fruits 
are  obtained."*  Here  Mill  takes  the  first  important  step 
in  the  analysis  of  the  functions  of  capital  in  production  ; 
but  almost  at  once  he  moves  off  in  another  direction,  by 
proceeding  to  consider  the  nature  of  the  return  secured 
by  the  persons  possessing  that  subsistence,  produced  by 
previous  labor,  which  is  needful  for  present  labor.  By 
thus  passing  at  once  to  the  •'  remuneration  for  abstinence," 
he  anticipates,  probably  to  the  confusion  of  readers  fresh 
to  the  subject,  the  discussion  of  profits  and  interest ;  while 
he  fails  to  describe  with  clearness  the  mode  in  which  dif- 
ferent steps  in  production,  of  necessity  succeeding  each 
other  and  so  spread  over  some  length  of  time,  result  final- 
ly in  the  finished  and  enjoyable  commodity.  The  simple 
and  fundamental  fact  is  but  obscurely  presented;  the 
more  complicated  corollary,  though  its  discussion  occu- 
pies some  pages,  is  yet  insufficiently  explained. 

This  failure  to  develop  simple  and  fundamental  truths, 
while  emphasizing  abstruse  doctrines  of  uncertain  sound, 
appears  throughout  the  treatment,  in  the  earlier  chapters, 
of  capital  in  relation  to  wages.  "  What  capital  does  for 
production,"  says  Mill  at  the  outset,  "is  to  afford  the 
shelter,  protection,  tools  and  materials  which  the  work 
requires,  and  to  feed  and  otherwise  maintain  the  labourers 

*  Book  i,  ch.  ii,  £  2. 


JOHN    STUART    MILL. 


219 


during  the  process."*  Thence  he  proceeds  at  once  to 
another  and  much  more  complicated  proposition, — that 
the  distinction  between  wealth  which  is  capital  and  wealth 
which  is  not,  depends  solely  on  the  intention  of  the  owner. 
Little  space  is  given  to  that  function  of  capital  which  is 

all-important   for   Mill's    later   reasoning  on  wages, the 

furnishing  of  food  and  maintenance  for  laborers.  Only 
as  an  afterthought,  at  the  close  of  another  section  of  the 
same  chapter,  does  Mill  bethink  himself  to  touch"  again 
on  this  simple  but  essential  matter.  "  It  will  be  observed," 
he  says,  "  that  I  have  assumed  that  the  labourers  are 
always  subsisted  from  capital ;  and  this  is  obviously  the 
fact,  though  the  capital  need  not  necessarily  be  furnished 
by  a  person  called  a  capitalist,"  f— after  which  there  is  no 
further  reference  to  a  fact  so  obvious. 

It  may  serve  still  further  to  show  in  what  manner  Mill 
handled  this  part  of  his  subject,  if  we  follow  some  of  the 
reasoning  which  rested  on  it.  The  deduction  on  which 
most  stress  is  laid  in  the  earlier  part  of  his  book,  and 
which  he  probably  had  most  at  heart  in  the  earlier  part  of 
his  career,  was  that  the  luxurious  expenditure  of  the  rich 
did  not  benefit  the  poor.  It  was  to  dispose  of  this  notion 
that  he  endeavored  at  such  length  to  show  that  capital 
could  find  indefinite  employment  in  advances  to  labor,  or 
in  his  own  words,  that  "  the  portion  [of  capital]  which  is 
destined  to  the  maintenance  of  labourers  may  be  indefi- 
nitely increased  without  creating  an  impossibility  of  find- 
ing the  employment."  The  same  motive  led  him  to  the 
elaborate  proof  that  demand  for  commodities  is  not  de- 
mand for  labor.J  This  much-maligned  proposition  is  a 
simple  corollary  from  the  axiom  (such  to  Mill's  mind  it 
seemed)  that  laborers  are  supported  by  the  product  of 


*  Book  I,  ch.  iv,  §  i.  f  Ibid.,  §  2,  at  the  end. 

\  In  §  9  of  chapter  iv,  Book  I. 


22O  WAGES   AND   CAPITAL. 

previous  labor,  dubbed  capital.  There  is  much  more  to 
say  than  is  found  in  Mill's  pages  of  the  part  which  luxuri- 
ous expenditure  and  demand  for  commodities  play  in  the 
working  machinery  of  modern  society.  The  economist  of 
our  own  day  would  be  likely  to  connect  the  discussion  of 
demand  for  commodities  with  the  general  law  of  demand, 
with  final  utility,  with  non-competing  groups  among  la- 
borers, and  with  the  general  interaction  of  exchange  and 
distribution.  And,  so  far  as  expenditure  by  the  rich  is 
concerned,  he  would  not  think  it  necessary  to  linger  long, 
in  the  earlier  stages  of  his  exposition,  on  the  notion  that 
luxurious  expenditure,  which  is  the  concrete  result  of  un- 
equal distribution,  can  be  of  essential  advantage  to  those 
whose  share  in  distribution  is  small.  But  Mill  not  only 
lingered  over  this  topic:  he  pushed  the  reasoning  in  an- 
other direction,  and  to  topics  of  the  greatest  difficulty 
and  complexity.  From  the  statement  that  the  real  de- 
mand for  labor  was  to  be  found  once  for  all  in  the  com- 
modities turned  over  to  the  laborers  for  their  use,  he 
proceeded  to  the  doctrine  that  capitalists  could  turn  over 
an  indefinitely  large  quantity  of  commodities  to  laborers, 
without  encountering  any  obstacle  or  embarrassment.  This 
was  the  point  at  which  the  whole  discussion  was  aimed. 
What  he  meant  was  that  "a  market"  for  such  goods 
could  be  found  without  difficulty  in  supplying  all  possi- 
ble wants  and  whims  of  the  laborers.  He  failed  to  con- 
sider,— failed  at  least  in  this  discussion, — that  a  stage 
might  be  reached  where  it  no  longer  was  profitable  to 
increase  the  advances. 

We  have  here  one  illustration, — a  multitude  such  might 
be  found, — of  Mill's  tendency,  partly  the  result  of  early 
training,  in  part  doubtless  inborn,  to  follow  to  its  last 
conclusion  one  single  line  of  reasoning,  regardless  of 
the  mode  in  which  other  considerations  must  be  taken  into 
account,  if  we  would  have,  not  merely  an  irrefragable 


JOHN    STUART    MILL.  221 

train  of  argument,  but  a  sufficient  explanation  of  real 
phenomena.  In  this  particular  case,  the  steady  advance 
of  an  increasing  quantity  of  commodities  to  laborers 
would  not  continue  unless  they  produced  something  over 
and  above  what  was  handed  to  them  ;  and  in  the  end  the 
possibility  of  steadily  enlarging  the  advances,  must  de- 
pend on  a  steady  increase  in  productive  powers  among  the 
laborers,  either  by  an  increase  in  numbers  or  a  gain  in 
efficiency.  This  ultimate  regulation  of  wages  (/.  e.,  of  ad- 
vances from  capitalists  to  laborers)  by  what  the  laborers 
produce,  is  touched  by  Mill  in  later  chapters;  but  it  is 
hardly  more  than  touched.  At  all  events,  in  his  first 
presentation  of  the  relation  of  wages  to  capital,  he  never 
hinted  at  any  bearing  of  product  on  wages  or  profits.  He 
confined  himself  to  the  axiom  that  saving  means  the  mak- 
ing of  advances  to  laborers,  and  to  the  deduction  that 
laborers  would  consume  any  quantity  of  goods  if  they 
had  the  chance.  Thus  the  discussion,  like  so  much  of  the 
deductive  reasoning  of  the  classic  school,  has  an  unreal 
tone  and  a  paradoxical  end  ;  and  even  taken  at  its  best, 
is  but  a  half  treatment  of  a  subject  which  particularly 
needs  full  and  complete  treatment. 

This  digression  from  our  main  subject  may  serve  to 
make  clear  how  Mill,  in  his  first  grappling  with  the  rela- 
tion of  capital  to  wages,  gave  much  more  prominence  to 
other  questions  than  the  immediate  forces  at  work.  He 
simply  took  it  for  granted  that  wages  were  paid  from 
capital.  We  may  proceed  now  to  consider  in  what  way 
he  used  this  proposition  when  he  came  to  the  specific 
treatment  of  wages  ;  and  more  especially  whether  he  gave 
it  more  precise  and  definite  form  than  his  predecessors 
and  contemporaries. 

Mill's  brief  statement  of  the  causes  on  which  wages 
depend,  familiar  as  it  is,  may  be  quoted  once  again  :  not 
only  because  it  is  significant  in  itself,  but  because  we  shall 


222  WAGES   AND   CAPITAL. 

have  occasion  to  refer  to  it  when  considering  the  writers 
who  came  after  Mill.  After  a  preliminary  statement  that 
competition,  not  custom,  must  be  regarded  in  the  present 
state  of  society  as  the  principal  regulator  of  wages,  he 
proceeds  thus : 

"  Wages,  then,  depend  mainly  upon  the  demand  and  supply  of 
labour ;  or,  as  it  is  often  expressed,  on  the  proportion  between 
population  and  capital.  By  population  is  here  meant  the  number 
only  of  the  labouring  class,  or  rather  of  those  who  work  for  hire  ;  and 
by  capital,  only  circulating  capital,  and  not  even  the  whole  of  that, 
but  the  part  which  is  expended  in  the  direct  purchase  of  labour. 
To  this,  however,  must  be  added  all  funds  which,  without  forming 
a  part  of  capital,  are  paid  in  exchange  for  labour,  such  as  the  wages 
of  soldiers,  domestic  servants,  and  all  other  unproductive  labourers. 
There  is  unfortunately  no  mode  of  expressing  by  one  familiar  term, 
the  aggregate  of  what  may  be  called  the  wages  fund  of  a  country ; 
and  as  the  wages  of  productive  labour  form  nearly  the'whole  of  that 
fund,  it  is  usual  to  overlook  the  smaller  and  less  important  part, 
and  to  say  that  wages  depend  on  population  and  capital.  It  will  be 
convenient  to  employ  this  expression,  remembering,  however,  to 
consider  it  as  elliptical,  and  not  as  a  literal  statement  of  the  whole 
truth. 

"  With  these  limitations  of  the  terms,  wages  not  only  depend  on 
the  relative  amount  of  capital  and  population,  but  cannot,  under  the 
rule  of  competition,  be  affected  by  anything  else.  Wages  (mean- 
ing, of  course,  the  general  rate)  cannot  rise,  but  by  an  increase  of 
the  aggregate  funds  employed  in  hiring  labourers,  or  a  diminution 
in  the  number  of  competitors  for  hire  ;  nor  fall,  except  either  by  a 
diminution  of  the  funds  devoted  to  paying  labour,  or  by  an  increase 
in  the  number  of  labourers  to  be  paid."  * 

Here  we  have  some  promise  of  an  analysis,  more  de- 
tailed than  was  common  among  previous  writers,  of  the 
"  funds  "  which  make  up  the  demand  for  labor.  Only  a 
part  of  circulating  capital  is  to  be  considered  ;  and  all 

*  Political  Economy,  Book  II,  ch.  xi,  §  I. 


JOHN    STUART    MILL.  22$ 

funds  with  which  "  unproductive  "  laborers  are  paid  are 
also  to  be  taken  into  account.  Both  of  these  qualifica- 
tions of  the  usual  statement  had  been  mentioned  by  other 
writers.  Ricardo  had  spoken  of  "  circulating  "  capital  as 
alone  belonging  to  the  demand  for  wages ;  Adam  Smith, 
Malthus,  Senior  still  more,  had  referred,  in  one  way  or 
another,  to  the  unproductive  laborers.  So  far  Mill  was 
on  much-trodden  ground. 

Mill  did  not  go  beyond  this  familiar  stage.  The  sen- 
tences just  quoted  contain  all  that  he  ever  said  directly 
and  explicitly  on  the  theory  of  the  wages  fund.  He 
passes  at  once  from  this  simple  statement,  of  which  no 
part  evidently  seemed  to  him  to  need  proof  or  explana- 
tion, to  the  dissection  of  certain  notions  inconsistent  with 
it.  This  was  Senior's  method;  in 'fact,  the  whole  modus 
operandi  appears  so  far  to  be  copied  from  Senior.  After 
brushing  aside  the  inconsistent  doctrines,  which  are  again 
disposed  of  with  reasoning  unimpeachable  as  far  as  it 
goes  and  inconclusive  because  not  going  far  enough,  he 
proceeds  to  the  point  which  he  conceived  really  to  need 
proof  and  emphasis  and  all  possible  illustration, — the 
principle  of  population  and  the  standard  of  living.  For 
three  long  chapters  every  phase  of  this  topic  is  discussed 
and  re-discussed.  The  persistence  with  which  it  is  ham- 
mered at,  compared  with  the  light  and  rapid  touch  on  the 
constitution  of  the  wages  fund,  indicates  that  Mill  thought 
the  fund  a  matter  of  little  moment  for  the  really  important 
problems  of  wages.  For  most  of  his  reasoning,  as  for 
that  of  almost  all  writers  after  the  time  of  Malthus  and 
Ricardo,  the  details  of  the  process  by  which  an  increase 
in  numbers  lowered  wages  were  not  of  much  moment.  It 
made  little  difference  whether  wages  were  said  to  depend 
proximately  on  capital,  or  subsistence,  or  wealth,  or  prod- 
uct. The  main  moral  deduced  from  the  dependence  of 
wages  on  the  funds  for  paying  them  was  that  the  growth 
16 


224 


WAGES   AND   CAPITAL. 


of  population  must  be  restrained  and  the  standard  of 
living  raised.* 

Thereafter,  through  the  greater  part  of  the  Principles, 
the  simple  and  familiar  formula  is  applied.  As  Mill  sum- 
marizes it  in  the  first  chapter  of  the  series  in  which  wages 
are  treated :  "  Wages  depend,  then,  on  the  proportion  be- 
tween the  number  of  the  labouring  population,  and  the 
capital  or  other  funds  devoted  to  the  purchase  of  labour  ; 
we  will  say,  for  shortness,  the  capital."  \  Like  Ricardo, 
Malthus,  and  Senior,  not  to  mention  lesser  lights,  Mill  be- 
gan by  using  "  capital  "  consciously  as  an  "  elliptical  ex- 
pression." Before  long,  he  used  it,  more  or  less  uncon- 
sciously, as  a  complete  and  sufficient  statement  of  what 
constituted  the  demand  for  labor. 

When  Mill  came  to  use  and  apply,  in  other  directions, 
the  proposition  that  capital  was.  once  for  all,  the  source 
of  immediate  demand  for  labor,  he  followed,  in  the  main, 
the  lines  on  which  Ricardo  had  reasoned.  In  the  third 
chapter  of  the  fourth  Book,  on  the  "  Influence  of  the 
Progress  of  Industry  and  Population  on  Rents,  Profits,  and 
Wages,"  the  proximate  cause  determining  wages  is  con- 
ceived to  be  simply  the  relative  growth  of  capital  and 
population.  "  Let  us  first  suppose  that  population  in- 
creases, capital  and  the  arts  of  production  remaining  sta- 
tionary. One  of  the  effects  of  this  change  of  circumstances 
is  sufficiently  obvious  :  wages  will  fall."  This  chapter  is  an 


*  Professor  Nicholson  remarks  (in  his  Principles  of  Political  Econ- 
omy, vol.  i,  p.  341):  "  It  follows,  then,  according  to  this  view  [the  wages 
fund  doctrine]  that  wages  can  only  rise  either  owing  to  an  increase 
of  capital  or  a  diminution  of  population,  and  this  accounts  for  the  ex- 
aggerated importance  attached  by  Mill  to  the  Malthusian  theory  of 
population."  The  converse  seems  to  me  nearer  the  truth  :  it  was  the 
exaggerated  importance  attached  to  the  Malthusian  theory  which  accounts 
for  the  stress  laid  on  the  wages  fund  doctrine, 
f  Book  II,  ch.  xi,  §  3. 


JOHN   STUART   MILL.  22$ 

elaboration,  with  no  essential  additions,  of  Ricardo's  Essay 
on  the  Influence  of  a  Low  Price  of  Corn  j  and  Mill,  in  follow- 
ing up  Ricardo's  conclusions,  accepted  the  practice  which 
his  master  had  adopted  even  in  this  early  essay,  of  dismiss- 
ing "market"  wages  summarily  as  determined  by  capital 
and  population.  Unlike  Ricardo,  Mill  had  keen  social  in- 
terests and  sympathies.  But  he  had  been  inured  from  boy- 
hood to  Ricardo's  rigid  and  quasi-mathematical  reasoning; 
and  his  own  intellectual  bent  was  in  the  same  direction.  In 
his  discussion  of  distribution,  he  was  absorbed,  as  his  ex- 
emplar had  been,  in  deducing  certain  consequences  as  to 
profits  and  rent  which  rested  on  the  assumption  that  real 
wages  were  fixed  at  a  stationary  point  by  ingrained  habits 
of  the  laborers.  The  wider  views  to  which  he  was  led  by 
his  social  sympathies  were  never  brought  into  direct  con- 
nection with  this  comparatively  narrow  reasoning.  At  all 
events,  they  did  not  serve  to  bring  his  attention  more 
closely  to  the  problem  of  the  immediate  and  direct  deter- 
mination of  wages. 

There  is,  however,  another  aspect  of  Mill's  teaching  on 
capital,  which  deserves  notice  :  his  conception  of  the  rela- 
tion between  the  general  advance  of  capital  to  all  laborers 
on  the  one  hand,  and  the  payment  of  wages  by  individual 
employers  on  the  other  ;  and,  in  connection  with  this,  his 
conception  of  the  rigidity  or  predetermination  of  the  funds 
for  hiring  laborers. 

Reference  has  already  been  made  to  Mill's  distinction 
between  capital  and  non-capital,  as  resting  solely  on  the 
intention  of  the  owner.  This  mode  of  defining  capital  he 
inherited,  like  other  doctrines,  chiefly  from  Ricardo,  who 
had  defined  capital  briefly  as  "  that  part  of  the  wealth  of 
a  country  which  is  employed  in  production."  M'Culloch 
had  tried  an  independent  flight  by  propounding  the  doctrine 
that  anything  which  might  conceivably  be  used  for  further 
production  was  capital ;  Malthus  had  brought  him  to  earth 


226  WAGES   AND   CAPITAL. 

by  answering  that  only  that  wealth  was  capital  which  was 
in  fact  used  for  production.  Whatever  these  varieties  in 
the  tradition  of  the  day,  Mill  followed  its  main  trend  in 
insisting  on  the  intention  of  the  owner  as  the  decisive 
element  in  determining  whether  a  particular  quantum  of 
wealth  was  or  was  not  capital. 

It  has  already  been  explained,  in  the  first  part  of  this 
volume,*  how  far  Mill  and  his  contemporaries  were  right, 
how  far  wrong.  They  were  wrong  in  supposing  that,  at 
any  given  moment,  the  intention  of  the  owner  settles 
whether  a  particular  item  of  wealth  is  or  is  not  capital. 
Under  any  possible  definition,  plant  and  materials  can  be 
nothing  but  capital.  It  has  indeed  been  sometimes  sug- 
gested that  the  owner  of  a  machine  may  sell  it,  and  squan- 
der the  proceeds:  thus  it  would  cease  to  be  capital  simply 
by  his  change  of  intention.  Obviously,  however,  such  a 
process  would  be  a  mere  shifting  of  the  ownership  of  the 
capital  from  one  hand  to  another  :  the  machine  still  re- 
mains inchoate  wealth  and  capital.  The  real  and  impor- 
tant truth  which  underlies  this  part  of  the  classic  doctrine 
appears  only  when  it  is  brought  into  connection  with  an- 
other part, — the  proposition  that  all  wealth  is  perpetually 
produced  and  consumed.  That  proposition,  originating 
with  the  Physiocrats  and  Adam  Smith,  f  was  set  forth  by 
Mill  in  lucid  terms;  yet,  curiously  enough,  he  failed  to 
apply  it  to  that  other  proposition,  on  the  determination 
of  capital  by  intention,  which,  standing  by  itself,  could  be 
so  misleading.  In  the  long  run  only,  and  in  view  of  the 
steady  waste  and  steady  reproduction  of  all  wealth,  is  it 
true  that  the  intention  settles  what  shall  be  capital  and 


*  See  Part  I,  Chapter  III,  pp.  61-62,  67-68. 

•(- See  Carman,  History  of  Theories  of  Production  and  Distribution,  p. 
15,  and  Wealth  of  Xations,  Book  II,  ch.  iii,  p.  149.  Compare  Mill's 
Principles,  Book  I,  ch.  v,  §  6. 


JOHN   STUART    MILL. 

what  shall  not  be.  On  this  topic,  as  on  others,  Mill  fol- 
lowed Ricardo's  example  of  sliding  rapidly  over  the  con- 
crete details  by  which  the  truth  of  his  propositions  ap- 
peared in  real  life :  with  results  sometimes  confusing  to 
himself,  and  certainly  confusing  to  later  students  of  his 
writings. 

The  cause  of  confusion  in  this  case  was  that  Mill's 
vague  doctrine  as  to  capital  and  intention  prevented  him 
from  making  any  clear  distinction  between  the  advance  of 
money  wages  by  employers,  and  the  advance  of  real  wages 
from  the  flow  of  the  community's  consumable  goods.  We 
have  seen  that  he  did  not  linger  long  on  those  causes 
which,  in  the  nature  of  complex  production,  make  neces- 
sary the  support  of  laborers  from  past  product.  It  was 
natural,  therefore,  that  he  should  fail  to  separate  sharply 
the  real  provision  of  consumable  goods  which  maintains 
laborers  during  the  prolonged  period  of  production,  from 
the  immediate  advance  of  funds  by  the  individual  em- 
ployer to  the  laborer  directly  hired  by  him.  Usually  he 
simplifies  the  matter  after  Ricardo's  method,  by  getting 
far  away  from  the  facts  of  concrete  industry,  and  suppos- 
ing the  capitalist  to  possess  so  many  quarters  of  wheat 
which  he  advances  to  laborers.  This  is  the  plan  which  he 
followes  in  the  discussion  of  the  effects  of  the  conversion 
of  circulating  capital  into  fixed, — "  circulating  "  capital 
there  meaning  wages  fund.  But  in  presenting  and  illus- 
trating the  doctrine  that  intention  determines  whether 
wealth  shall  or  shall  not  be  capital,  he  considers  the  case 
in  more  realistic  fashion. 

"  A  manufacturer,  for  example,  has  one  part  of  his  capital  in  the 
form  of  building's.  Another  part  he  has  in  the  form  of  machinery. 
A  third  consists,  if  he  be  a  spinner,  of  raw  cotton,  flax,  or  wool  ;  if 
a  weaver,  of  flaxen,  woollen,  silk,  or  cotton,  thread;  and  the  like, 
according  to  the  nature  of  the  manufacture.  Food  and  clothing  for 
his  operatives,  it  is  not  the  custom  of  the  present  age  that  he 


228  WAGES   AND   CAPITAL. 

should  directly  provide.  .  .  .  Instead  of  this,  each  capitalist  has 
money,  which  he  pays  to  his  work  people,  and  so  enables  them  lo 
supply  themselves  :  he  has  also  finished  goods  in  his  warehouse,  by 
the  sale  of  which*  he  obtains  more  money,  to  employ  in  the  same 
manner,  as  well  as  to  replenish  his  stock  of  matt-rials,  to  keep  his 
buildings  and  machinery  in  repair,  and  to  replace  them  when  worn 
out.  His  money  and  finished  goods,  however,  are  not  wholly  capi- 
tal, for  he  does  not  wholly  devote  them  to  these  purposes  :  he  em- 
ploys a  part  of  the  one,  and  of  the  proceeds  of  the  other,  in  supply- 
ing his  personal  consumption  and  that  of  his  family,  or  in  hiring 
grooms  and  valets,  or  maintaining  hunters  and  hounds,  or  in  edu- 
cating his  children,  or  in  paying  taxes,  or  in  charity.  What  then  is 
his  capital  ?  Precisely  that  part  of  his  possessions,  whatever  it  be, 
which  he  designs  to  employ  in  carrying  on  fresh  production.  It  is 
of  no  consequence  that  a  part,  or  even  the  whole  of  it,  is  in  a  form 
in  which  it  cannot  directly  supply  the  wants  of  labourers."  * 

Here  the  capital  of  the  community  is  analyzed  in  a 
manner  that  implies  that  it  is  all  in  the  hands  of  the  em- 
ployers who  directly  hire  laborers,  or  under  their  control : 
the  money  and  the  proceeds  of  the  finished  goods  being 
the  sources  from  which  wages  are  paid.  In  the  next  para- 
graph Mill  illustrates  his  reasoning  by  supposing  the  case 
of  a  hardware  manufacturer  whose 

"  stock  in  trade,  over  and  above  his  machinery,  consists  at  present 
wholly  in  iron  goods.  Iron  goods  cannot  feed  labourers.  Never- 
theless, by  a  mere  change  of  the  destination  of  the  iron  goods,  he 
can  cause  labourers  to  be  fed." 

The  attentive  reader  of  the  passages  that  follow  this 
statement  will  see  that  Mill  did  not  fall  into  the  error  of 
supposing  that  laborers  could  be  fed  without  the  where- 
withal to  feed  them.  If  there  is  no  additional  food  in  the 
country, 

"  it  must  be  imported,  if  possible  ;  if  not  possible,  the  labourers  will 
remain  for  a  season  on  their  short  allowance  ;  but  the  consequence 

*  Book  I,  ch.  iv,  g  i. 


JOHN   STUART   MILL.  229 

of  this  change  in  the  demand  for  commodities,  occasioned  by  the 
change  in  the  expenditure  for  capitalists  Irom  unproductive  to  pro- 
ductive, is  that  next  year  more  food  will  be  produced,  and  less  plate 
and  jewels." 

Here  we  have  a  sufficiently  explicit  hint  that  it  may  take 
time  for  the  intention  of  the  capitalists  to  work  out  its  ef- 
fects on  the  form  which  the  community's  possession  shall 
have;  and  it  is  surprising  that  Mill  did  not  come  back  to 
this  point  when  in  the  next  chapter  he  dilated  on  the  per- 
petual consumption  and  reproduction  of  capital.  As  it 
was,  his  language  might  be  easily  interpreted  to  mean 
that  the  sources  from  which  wages  came  were  the  funds 
or  proceeds  in  the  hands  of  the  immediate  employer :  an 
interpretation  freely  made  by  later  writers,  and,  as  we  shall 
see,  the  source  of  a  long  and  unprofitable  controversy.* 

*  In  the  earlier  Essays  on  Some  Unsettled  Questions  of  Political  Econ- 
omy, written  in  1829  and  1830,  though  not  published  till  1844,  there  is  a 
passage  which  deserves  to  be  read  in  co'nnection  with  those  quoted  in  the 
text.  In  the  second  of  the  essays,  the  question  of  gluts  is  taken  up,  and,  as 
part  of  it,  the  effect  of  a  "  brisk  demand  "  on  production.  Mill  presented, 
in  the  main,  the  orthodox  view,  .but  conceded  something  to  Malthus,  by 
admitting  that  a  brisk  demand  might  serve  virtually  to  increase  the  com- 
munity's capital.  Capital  he  defines,  as  he  did  later  in  the  Political 
Economy,  by  intention  :  it  is  "  all  wealth  which  the  individual  or  nation 
has  in  possession  for  the  purpose  of  reproduction.  .  .  .  All  unsold  goods, 
therefore,  constitute  a  part  of  the  national  capital,  and  of  the  capital  of 
the  producer  or  dealer  to  whom  they  belong.  ...  If,  after  having  sold 
the  goods,  I  hire  labourers  with  the  money,  and  set  them  to  work,  I  am 
surely  employing  capital,  though  the  corn,  which  in  the  form  of  bread 
those  labourers  may  buy  with  the  money  may  be  now  in  the  warehouse 
at  Dantzig,  or  perhaps  not  yet  above  the  ground."  This  is  dubious  doc- 
trine ;  and  the  consequences  which  Mill  draws  from  it  show  how  he  con- 
founded the  advantages  from  a  rapid  succession  of  the  different  stages  in 
production,  with  a  real  increase  in  the  community's  productive  apparatus. 
"  An  additional  customer,  to  most  dealers,  is  equivalent  to  an  increase  of 
their  productive  capital.  He  enables  them  to  convert  a  portion  of  their 
capital  which  was  lying  idle  (and  which  never  could  have  become  produc- 


230 


WAGES   AND   CAPITAL. 


The  same  lack  of  precise  statement  as  to  the  way  in 
which  capital  performs  its  function  of  supporting  laborers, 
appears  in  other  parts  of  these  earlier  chapters  on  capital. 
Such  terms  as  "  funds,"  "  sums,"  "  capital  paid  out,"  are 
used,  in  a  manner  that,  not  unfairly  construed,  connotes 
money  ;  and  the  reader  is  led  to  think  of  money  available 
for  paying  wages  as  the  important  thing  for  the  welfare  of 
laborers.  When  a  great  loan  is  raised  for  war  purposes,  "  it 
must  have  been  wholly  drawn  from  the  portion  employed  in 
paying  labourers  "  ;  and  "  if  they  produce  as  much  as  usual, 
having  been  paid  less  by  so  many  millions  sterling,  these 
millions  are  gained  by  their  employers."  :  The  attentive 
reader  will  here  again  read  between  the  lines, — and  indeed 
in  places  within  the  lines, — that  Mill  was  really  intent  on 
the  consumption  for  military  purposes  of  food  and  other 
consumable  goods  that  would  otherwise  have  gone  to  pro- 
ductive laborers;  the  breach  in  the  capital  of  the  country 
coming  from  the  "  unproductive  "  consumption  of  these 
commodities.  Even  from  this  point  of  view,  it  would  need 


live  in  their  hands  until  a  customer  was  found)  into  wages  and  instru- 
ments of  production  ;  and  if  we  suppose  that  the  commodity,  unless 
bought  by  him,  would  not  have  found  a  purchaser  for  a  year  after,  then 
all  which  a  capital  of  that  value  [note  this  phrase]  can  enable  men  to 
produce  during  a  year  is  clear  gain, — gain  to  the  dealer  or  producer,  and 
to  the  labourers  whom  he  will  employ,  and  thus  (if  no  one  sustains  corre- 
sponding loss)  gain  to  the  nation." — Essays,  p.  54. 

From  this  sort  of  reasoning  as  to  capital,  it  would  clearly  follow  that 
the  circulating  capital  whence  wages  are  paid,  so  far  from  being  a  rigid 
quantity,  is  a  very  flexible  and  expansible  one.  Although  Mill  published 
the  essay  in  1844,  he  did  not  incorporate  the  matter  of  it,  as  he  did  that 
of  others,  in  the  Political  Economy,  printed  in  1840.  Indeed,  the  chap- 
ter on  excess  of  supply  (Bk.  Ill,  ch.  xiv)  does  not  mention  the  effects 
of  brisk  demand  among  the  things  that  might  palliate  Malthus's  errors. 
Perhaps,  on  maturcr  consideration,  the  reasoning  of  the  essay  struck 
him  as  unsatisfactory. 

*  Book  I,  ch.  v,  g  8. 


JOHN    STUART    MILL.  23! 

to  be  explained  that  the  unproductive  consumption  is  a 
matter  of  no  consequence  to  the  mass  of  the  laborers  at  the 
outset;  during  the  first  year,  or  the  first  cycle  of  pro- 
duction, it  makes  no  difference  to  them  whether  they  get 
their  food  in  exchange  for  the  work  of  tilling  the  ground 
or  of  destroying  human  life.  Only  in  the  next  stage,  when 
no  food  has  been  created  in  place  of  that  destroyed,  will 
the  final  effects  of  the  wastefulness  of  war  be  felt.  But 
Mill's  language  is  of  capital  in  millions  sterling,  and  of 
funds  borrowed  and  spent.  Whether  his  own  thought  was 
confused,  or — as  is  more  likely — he  was  so  intent  on 
other  parts  of  the  reasoning  that  he  half-unconsciously 
adopted  a  convenient  short  cut  at  this  stage,  he  certainly 
bred  confusion  in  the  minds  of  his  later  expounders  and 
critics. 

So,  in  discussing  the  conversion  of  circulating  capital 
into  fixed,  Mill  does  indeed  often  describe  tfiis  circulating 
capital  in  terms  of  so  many  quarters  of  corn  ;  but  he 
refers  to  the  possibility  that  the  fixed  capital  may  be 
created,  "not  by  withdrawing  capital  from  actual  circula- 
tion, but  by  the  employment  of  the  annual  increase."  * 
As  a  matter  of  fact,  the  mode  in  which  the  steady  growth 
of  savings  supplies  the  resources  for  increasing  real  capi- 
tal without  entailing  even  a  temporary  diminution  of  the 
commodities  constituting  "  circulating  capital,"  is  very 
complicated,  and  can  be  understood  only  by  analyzing  the 
operations  of  production  over  a  considerable  period.  But 
Mill  here  again  made  a  short  cut  for  himself  and  his  read- 
ers by  considering  both  the  circulating  capital  and  the 
fresh  accumulations  in  terms  of  money.  The  same  thing 
is  implied  in  the  passage  in  which  Mill  refutes  those  who 
maintained  that  an  income  tax,  while  apparently  falling 
on  the  rich  alone,  really  takes  from  them  what  they  would 

*  Book  I,  ch.  vi,  §  3. 


232 


WAGES   AND   CAPITAL. 


otherwise  have  spent  among  the  poor.*  Mill  makes  a 
distinction  :  "  So  far,  indeed,  as  what  is  taken  from  the 
rich  in  taxes,  would,  if  not  so  taken,  have  been  saved  and 
converted  into  capital,  ...  to  that  extent  the  demand 
for  labour  is  no  doubt  diminished.  .  .  .  But  even  here  the 
question  arises,  whether  the  government,  after  receiving 
the  amount,  will  not  lay  out  as  great  a  portion  of  it  in  the 
direct  purchase  of  labour,  as  the  tax-payers  would  have 
done."  This  looks  again  to  the  money  in  the  hands  of 
one  or  another  set  of  spenders  as  the  thing  whose  volume 
and  movement  should  be  considered,  if  we  would  ascertain 
whether  the  laborers'  wages  will  be  raised  or  lowered. 

In  a  paragraph  immediately  succeeding  that  last 
quoted,  Mill  remarks  that  "  error  is  produced  by  not  look- 
ing directly  at  the  realities  of  the  phenomena,  and  attend- 
ing only  to  the  outward  mechanism  of  paying  and  spend- 
ing." Unfortunately,  that  outward  mechanism  was  all 
too  prominent  in  his  own  exposition  ;  especially  in  dis- 
cussions of  the  effects  of  any  specific  measure  which 
involved  an  incidental  consideration  of  the  mechanism  of 
payment,  as  to  laborers  and  their  welfare.  On  the  rela- 
tion between  the  money  funds  or  proceeds  held  by  the 
immediate  employer,  and  the  food,  clothes,  and  enjoy- 
ments, constituting  the  community's  real  "circulating 
capital,"  he  gave  ambiguous  and  unsatisfactory  state- 
ments, from  which  only  a  sympathetic  interpreter  could 
patch  up  a  consistent  and  tenable  doctrine. f 

*  Book  I,  ch.  v,  §  10. 

f  A  characteristic  passage,  illustrative  of  the  uncertain  tone  with 
which  Mill  spoke,  is  the  following,  taken  from  the  chapter  on  the  Conse- 
quences of  the  Tendency  of  Profits  to  a  Minimum.  I  have  italicized  some 
significant  words.  "  \Vhat  is  laid  out  in  the  bona  fide  construction  of 
the  railway  itself  is  lost  and  gone  :  when  once  expended,  it  is  incapable 
of  ever  being  paid  in  wages  or  applied  to  the  maintenance  of  labourers 
again  ;  as  a  matter  of  account,  the  result  is  that  so  much  food  and  cloth- 


JOHN   STUART   MILL.  233 

Some  further  light  on  the  form  which  the  wages  fund 
doctrine  assumed  in  Mill's  hands,  may  be  had,  finally,  by 
considering  one  question  more, — his  views  on  that  rigidity 
or  predetermination  of  the  fund  which  was  so  hotly  dis- 
cussed by  later  writers. 

In  the  chapter  specifically  devoted  to  wages,  the  pas- 
sages quoted  above  show  no  stress  on  the  rigidity  of  the 
fund,  and  indeed  hardly  give  an  indication  one  way  or  the 
other  as  to  Mill's  opinion.  Like  his  contemporaries,  he 
did  not  stop  to  consider  the  point.  He  passed  so  quickly 
from  "  market "  wages  to  normal  or  "  natural  "  wages, 
that  he  was  not  led  to  ask  deliberately  whether  market 
wages  at  a  given  period  were  or  were  not  predetermined. 
We  have  just  seen  how  often,  in  other  passages  than  those 
which  were  expressly  concerned  with  wages,  he  discussed 
the  relations  between  capitalists  and  laborers  as  if  the  es- 
sential thing  were  the  advance  of  money  funds  or  pro- 
ceeds by  the  individual  employers.  On  this  basis,  he 
could  hardly  have  entertained  the  notion  of  any  rigid 
source  of  wages;  for  he  had  set  forth  that  these  funds 
would  shrink  or  swell  with  the  capitalist's  change  of  in- 
tention, and  had  implied  that  they  varied  with  his  con- 
trol over  immediate  money  funds.  In  the  main  there  is 
thus  little  direct  indication  in  the  body  of  the  Political 
Economy  of  any  iron-clad  doctrine,  and  certain  proof  that 
such  a  doctrine,  if  entertained  at  all,  was  far  from  promi- 
nent in  Mill's  own  thinking. 

There  do  not  lack  intimations,  however,  that  under- 
neath, and  without  much  emphasis  on  the  matter  in  his 
own  mind,  Mill  held  to  a  doctrine  of  the  iron-clad  sort. 

ing  and  tools  have  been  consumed,  and  the  country  has  got  a  railway 
instead.  But  what  I  would  urge  is  that  sums  so  applied  arc  mostly  a 
mere  appropriation  of  the  annual  overflowing  which  would  otherwise 
have  gone  abroad,"  and  so  on. — Political  Economy,  Book  IV,  chap- 
ter v,  §  2. 


234 


WAGES   AND   CAPITAL. 


In  the  very  discussion  of  the  effect  of  the  owner's  inten- 
tion on  the  increase  or  decrease  of  capital,  he  suggests 
that  it  will  take  time  to  alter  the  existing  supply  of  food; 
the  food  being  treated,  in  Ricardian  fashion,  as  the  one 
essential  constituent  of  real  wages.  TrTe  implication  is 
that  in  any  one  season,  this  "circulating  capital"  is  so 
much  and  can  be  no  more.  The  same  uncompromising 
view  appears  more  explicitly  in  the  chapter  in  the  fifth 
Book  which  treats  of  combinations  among  laborers. 
There  it  is  reasoned  that  even  if  a  general  combination 
of  all  laborers  could  be  effected, 

"  they  might  doubtless  succeed  in  diminishing  the  hours  of  labour, 
and  obtaining  the  same  wages  for  less  work.  But  if  they  aimed  at 
obtaining  actually  higher  wages  than  the  rate  fixed  by  demand  and 
supply — the  rate  which  distributed  the  whole  circulating  capital  of 
the  country  among  the  entire  working  population — this  could  only 
be  accomplished  by  keeping  a  part  of  their  number  permanently 
out  of  employment.  As  support  from  public  charity  would  of 
course  be  refused  to  those  who  could  get  work  and  would  not  ac- 
cept it,  they  would  be  thrown  for  support  upon  the  trades  union  of 
which  they  were  members  ;  and  the  work-people  collectively  would 
be  no  better  off  than  before,  having  to  support  the  same  numbers 
out  of  the  same  aggregate  wages.  In  this  way,  however,  the  class 
would  have  its  attention  forcibly  drawn  to  the  fact  of  a  superfluity 
of  numbers,  and  to  the  necessity,  if  they  would  have  higher  wages, 
of  proportioning  the  supply  of  labour  to  the  demand."  * 

Here  we  have  something  like  the  stern  and  ominous 
wages  fund  which  rouses  the  ire  of  the  friend  of  the 
working-man.  The  succeeding  paragraphs  of  the  same 
section  show  with  equal  plainness  that,  sometimes  at  least, 
Mill  had  clearly  in  mind  the  doctrine  that  for  the  time 
being  the  total  demand  for  labor  was  fixed  unalterably. 
He  argues  that  a  partial  rise  in  wages — /.  e.,  a  rise  in  the 

*  Book  V,  ch.  x,  §  5. 


JOHN    STUART    MILL.  235 

wages  of  a  particular  group  of  laborers — may  indeed  be 
secured  without  corresponding  loss  to  other  laborers;  but 
only  in  the  end,  not  for  the  moment.  It  is  only  after  the 
lapse  of  some  time  that  this  happy  result  can  be  secured. 

"  It  may  appear,  indeed,  at  first  sight,  that  the  high  wages  of 
type-founders  (for  example)  are  obtained  at  the  general  cost  of  the 
labouring  class.  This  high  remuneration  either  causes  fewer  persons 
to  find  employment  in  the  trade,  or,  if  not,  must  lead  to  the  invest- 
ment of  more  capital  in  it,  at  the  expense  of  other  trades  :  in  the 
first  case,  it  throws  an  additional  number  of  labourers  on  the  gen- 
eral market ;  in  the  second,  it  withdraws  from  that  market  a  portion 
of  the  demand  ;  effects,  both  of  which  are  injurious  to  the  working 
classes.  Such,  indeed,  would  really  be  the  result  of  a  successful 
combination  in  a  particular  trade  or  trades,  for  some  time  after  its 
formation  ;  but  when  it  is  a  permanent  thing,  the  principles  so  often 
insisted  on  in  this  treatise,  show  that  it  can  have  no  such  effect. 
The  habitual  earnings  of  the  working  classes  at  large  can  be  af- 
fected by  nothing  but  the  habitual  requirements  of  the  labouring 
people  :  these,  indeed,  may  be  altered,  but  while  they  remain  the 
same,  wages  never  fall  permanently  belo\v  the  standard  of  these  re- 
quirements, and  do  not  long  remain  above  that  standard." 

In  other  words,  general  wages  are  fixed  definitively 
at  any  one  period  by  the  wages  fund.  Only  after  a  lapse 
of  time  can  any  other  factor  enter  ;  and  then  the  factor 
which  is  important  is  that  which  all  the  thinkers  of  this 
generation  held  to  be  promptly  decisive:  the  standard  of 
living. 

In  Mill's  case,  as  in  Ricardo's,  it  would  be  unfair  to  lay 
too  much  stress  on  brief  passages  of  this  sort,  interjected 
into  a  discussion  of  the  policy  which  the  legislature  ought 
to  pursue  in  regard  to  labor  unions.  But  they  show 
clearly  how  natural  to  Mill  was  the  Ricardian  way  of  un- 
relenting reasoning  from  an  assumed  premise :  and  one 
premise  was  that  in  any  given  season  there  was  so  much 
"circulating  capital"  in  the  community,  and  could  be  no 


236 


WAGES  AND    CAPITAL. 


more.  They  show,  too,  how  Mill,  like  Ricardo,  lingered 
but  for  a  moment  on  this  phase  of  the  wages  question, 
touching  it  so  briefly  that  we  can  not  be  sure  how  rigor- 
ously he  would  have  maintained  his  doctrines  if  pressed 
to  a  more  explicit  and  emphatic  statement.  Like  Ricardo 
again,  he  passed  at  once  to  that  other  phase  of  the  wages 
question  which  seemed  to  him  of  pressing  importance : 
the  "  habitual  requirements  of  the  labouring  people," 
which  constituted  the  one  force  to  be  made  prominent  in 
the  statement  of  the  laws  governing  general  wages. 

So  much  for  the  theory  as  Mill  left  it.  The  wages  fund 
doctrine  is  stated  briefly  and  boldly  ;  its  foundation  in  the 
nature  of  civilized  production  is  hardly  noticed  ;  its  teach- 
ing is  aimed  chiefly  at  the  need  of  repressing  numbers. 
Its  application  in  other  directions  is  cumbered  and  con- 
fused by  references  to  funds  and  capital  in  terms  of  money, 
which  obscure  the  essential  truths  of  the  doctrine,  and  be- 
came the  source  of  the  memorable  but  fruitless  contro- 
versy which  resulted  in  Mill's  recantation. 

Before  proceeding  to  the  next  chapter,  in  which  that 
controversy  is  to  be  taken  up,  we  may  glance  for  a  mo- 
ment at  Mill's  more  immediate  followers.  Little  is  to  be 
learned  for  our  purposes  from  an  examination  of  the 
popularizers  who  belong  to  this  period  of  placid  content 
with  the  perfect  completeness  of  economic  teaching.  In 
the  main,  they  repeated  what  Mill  had  said,  with  slight 
individual  variations.  A  very  few  words  as  to  one  or  two 
typical  expounders  of  what  was  then  supposed  to  be  estab- 
lished truth,  will  suffice  to  indicate  the  stage  at  which  the 
wages  fund  doctrine  stood  in  England  for  near  twenty 
years. 

Charles  Morrison  published  in  1856  An  Essay  on  the 
Relations  between  Labour  and Capital 'which  reflects  faithfully 
the  attitude  likely  to  be  taken  by  one  trained  in  the  eco- 


JOHN   STUART    MILL.  237 

nomics  of  the  day  and  not  possessed  of  the  will  or  capacity 
to  follow  the  current  doctrines  to  their  roots.  Wages  are 
regulated  by  the  ratio  between  capital  and  labor.  The 
fund  for  paying  wages  is  "  that  part  of  the  active  or  pro- 
ductive capital  of  the  nation  which  is  not  required  for 
some  other  employment  necessary  to  the  business  of  pro- 
duction "  [7.  e.,  not  for  plant  and  materials].  The  division 
is  determined  by  "  the  nature  of  things  "  ;  hence  the  wages 
fund  is  "a  definite  proportion  of  the  entire  active  capital." 
So  much  the  employers,  it  is  implied,  must  pay  away  to 
laborers.  Even  if  they  were  "  universally  misers,"  and 
were  trying  to  get  "the  greatest  possible  profit,"  this 
would  "  not  diminish  the  sum  expended  in  labour ;  and 
consequently  would  not  lower  the  rate  of  wages."  * 

As  to  combinations  and  strikes,  Morrison  argues  that 
they  are  only  harmful.  True,  some  employers  might  be 
forced  to  pay  higher  than  "competitive"  wages;  but  "ac- 
cording to  the  laws  which  govern  wages,"  such  a  result 
could  not  be  permanent.  Yet  it  is  noted  that  "  the  exist- 
ing generation  of  manufacturers  might  be  ruined  before 
the  last  results  of  the  process  were  worked  out":  which 
seems  to  admit  that  for  a  while  at  least,  and  perhaps  a 
good  while,  the  conditions  determining  wages  might  not 
be  so  absolutely  rigid  after  all.f  There  is  an  admission  of 
a  similar  sort,  again  made  without  any  glimpse  of  the 
consequences  to  which  it  might  lead,  in  a  curious  bit  of 
reasoning  as  to  the  possible  effects  of  confidence  and 
credit  in  swelling  the  wages  fund.  During  a  period  of 
universal  confidence  a  given  fund  would  be  turned  over 
quickly  by  each  capitalist.  Thus  a  wages  capital  of  ^10,- 
ooo  would  be  turned  over  perhaps  five  times  in  an  active 
year,  three  times  in  a  dull  one  ;  the  virtual  wages  fund 
would  be  ^50,000  in  the  first  case,  ^30,000  in  the  second. 

*  Essay,  pp.  19,  20.  f  Ibid.,  p.  99. 


238  WAGES   AND   CAPITAL. 

Hence  the  source  of  wages  is  defined,  in  a  later  summary, 
as  "  the  funds  available  for  their  [the  laborers']  payment, 
multiplied  by  the  average  rapidity  with  which  those  funds 
are  turned  over."  Morrison  considered  this  an  important 
addition  to  the  laws  regulating  wages  :  its  innuendo  as  to 
the  evil  effects  of  strikes  and  disturbances  is  obvious 
enough.*  Clearly  it  conceives  the  wages  fund  in  terms 
of  money  or  funds  in  the  hands  of  the  capitalist.  But 
from  this  point  of  view,  it  is  also  clear  that  the  wages 
fund  might  be  flexible,  not  merely  because  of  variations 
in  confidence  and  commercial  activity,  but  from  pressure 
from  the  trades-union  or  any  one  of  a  dozen  imaginable 
causes.  That  no  turn  of  this  sort  in  the  reasoning  oc- 
curred to  Morrison,  a  man  of  candid  intelligence  and  real 
public  spirit,  shows  how  rare  after  all  is  the  capacity  for 
even  comparatively  simple  steps  in  independent  thinking. 
Of  a  different  type,  and  worth  noting  because  of  the 
prominent  place  which  he  long  held  as  an  authoritative 
text-book  writer,  is  Henry  Fawcett.  His  Manual  of  Po- 
litical Economy,  first  published  in  1863, \  was  for  near  a 
generation  an  accepted  text-book  for  those  not  able  to 
undertake  Mill's  larger  and  more  abstruse  volumes;  and 
its  dilution  of  the  strength  of  the  original  has  caused  it  to 
be  described,  not  unfairly,  as  "  Mill  and  water."  Here 
capital  is  defined  as  the  fund  from  which  labor  is  remu- 
nerated; it  follows  at  once  that  "wages  in  the  aggregate 
depend  on  a  ratio  between  capital  and  population."  This 
is  not  qualified  or  explained,  as  it  was  by  Mill,  as  an 
"  elliptical  expression  "  :  it  simply  serves  to  introduce,  with- 

*  See  chapters  xvii  and  xviii  of  Morrison's  Essay.  His  doctrine  here  is 
virtually  the  same  as  that  which  Mill  set  forth  in  his  Essays  in  Political 
Economy,  but  did  not  see  fit  to  retain  in  the  Political  Economy.  See  the 
note  to  p.  229,  above. 

f  I  have  used  the  third  edition,  published  in  1867.  The  passages 
referred  to  are  in  Book  II,  chapters  iv,  v,  ix. 


JOHN    STUART    MILL.  239 

out  delay,  the  Malthusian  proposition.  On  the  other 
hand,  practically  nothing  is  made  of  the  wages  fund  when 
Fawcett  comes  to  the  question  of  trade-unions  and  their 
effect  on  wages, — questions  which  absorbed  public  atten- 
tion when  he  wrote,  and  led  him  to  more  pointed  writing 
than  was  possible  in  the  simple  process  of  condensing 
Mill.  In  the  discussion  of  these  living  questions,  Faw- 
cett's  views,  so  far  as  they  bear  on  the  wages  fund,  are 
certainly  not  excessively  orthodox.  The  slow  and  imper- 
fect working  of  competition  is  explained,  and  the  greater 
tactical  strength  which  laborers  get  from  combination  is 
fully  set  forth.  On  the  other  hand,  as  to  strikes  and 
their  success,  the  wages  fund  simply  does  not  appear  at 
all. 

Much  the  same  is  the  case  in  Fawcett's  volume  on  the 
Economic  Position  of  the  British  Labourer,  published  in  1865. 
Here  again  we  find  at  the  outset  the  old  and  wearisome 
phrase  as  to  the  ratio  between  population  and  circulating 
capital;  and  with  it  an  equally  wearisome  phrase  to  the 
effect  that  "  the  laws  regulating  wages  are  as  certain  in 
their  effects  as  those  which  control  physical  nature."  But 
in  the  chapter  on  Trade-Unions,  the  wages  fund  and  the 
•natural  laws  fade  away  into  nothingness.  u  Natural " 
wages,  it  is  explained,  do  not  result  at  once  or  even 
quickly  from  mere  competition.  Combinations  have  their 
effects,  among  masters  as  well  as  among  men.  The  ten- 
dency of  profits  to  a  minimum,  and  the  check  to  accumu- 
lation from  a  fall  in  profits, — these,  rather  than  the  wages 
fund,  are  the  obstacles  in  the  way  of  deep-reaching  effects 
from  combinations  and  strikes.  Of  profits  and  their  mini- 
mum and  the  accumulation  of  capital  we  shall  hear  more 
in  due  time  :  what  the  classic  writers  and  their  expounders 
had  to  say  on  this  topic  was  stated  better  and  more  fully 
by  Cairnes,  whose  position  we  shall  consider  in  the  next 
chapter.  It  is  significant,  as  to  Fawcett,  that  we  find  in 
17 


240 


WAGES   AND  CAPITAL. 


him  little  of  the  disposition  to  fling  the  wages  fund  at  the 
head  of  the  laborers  which  is  so  much  associated  with  the 
orthodox  doctrines.  We  have  seen  that  writers  of  the  pre- 
vious generation, — Torrens,  M'Culloch,  and  their  fellows, 
— made  little  use  of  it  in  this  direction.  Like  them,  and 
like  his  master,  Mill,  Fawcett  thought  of  it  but  little  in 
connection  with  disputes  about  wages,  and  used  it  chiefly 
as  a  means  of  inculcating  the  need  of  that  prudence  in 
multiplication  which  seemed  to  all  of  these  men  the  main 
instrument  of  social  salvation. 


CHAPTER   XII. 

LONGE — THORNTON — MILL — CAIRNES. 

WE  come  now  to  the  most  dramatic  episode  in  the  his- 
tory of  the  wages  fund  doctrine, — the  attacks  on  it  by 
Longe  and  Thornton,  and  Mill's  surrender  to  the  latter. 
Immediately  after,  came  Cairnes's  endeavor  to  reshape  and 
rehabilitate  the  doctrine  ;  the  first  attempt,  since  Adam 
Smith's  day,  at  a  deliberate  and  careful  statement  of  its 
meaning.  All  this  stir  was  due,  as  is  usually  the  case  with 
such  a  burst  of  active  discussion,  to  the  pressure  of  prac- 
tical problems.  The  trade  union  question  had  entered 
on  a  new  phase:  the  great  commission  of  1867  was  both 
a  result  and  a  further  cause  of  the  concentration  of  public 
opinion  on  disputes  about  wages.  Naturally  the  theory 
of  wages  in  general  received  a  larger  share  of  attention. 

Francis  D.  Longe,  a  London  barrister,  not  known  be- 
fore or  much  noted  after  as  a  writer  on  economic  sub- 
jects, published  in  1866  an  eighty-page  pamphlet  under  the 
title,  A  Refutation  of  the  Wages  Fund  Theory  of  Modern  Po- 
litical Economy,  as  enunciated  by  Mr.  Mill  and  Mr.  Faivcett. 
As  the  title  indicates,  Longe  made  no  pretence  of  examin- 
ing the  history  of  the  theory,  or  its  presentation  by  any 
long  series  of  writers.  He  took  the  two  books  then  most 
in  vogue,  and  examined  the  current  doctrine  as  there  ex- 
pounded. To  that  doctrine,  he  found  three  objections  to 
make:  (i)  that  there  is  no  definite  fund,  distinct  from  the 
general  possessions  of  the  community,  devoted  to  the  pay- 

241 


242 


WAGES   AND   CAPITAL. 


ment  of  wages ;  (2)  that  the  laborers  do  not  constitute  a 
body  among  whom  the  aggregate  fund  could  be  divided 
by  competition  ;  (3)  that  the  wages  fund  doctrine  "  in- 
volves an  erroneous  notion  of  the  demand  and  supply 
principle."  Of  these  objections,  we  may  consider  for  the 
present  the  first  only.  The  second,  as  to  the  distribution 
of  the  wages  fund  among  different  classes  of  laborers, 
does  not  deal  with  the  essence  of  the  old  doctrine,  whose 
expositors  had  always  referred,  more  or  less  clearly,  to 
the  multiform  causes  that  might  influence  the  particular 
share  of  the  general  fund  which  might  go  to  one  set  of 
laborers  or  another.  In  any  case,  this  part  of  the  contro- 
versy was  not  handled  by  Longe  in  a  manner  to  attract, 
or  indeed  to  deserve,  much  attention.  The  third  objec- 
tion, as  to  the  general  law  of  supply  and  demand  in  rela- 
tion to  wages,  was  put  more  effectively,  and  had  a  wider 
hearing;  but  its  consideration  may  be  postponed  until  we 
reach,  in  a  later  part  of  the  present  chapter,  the  same 
line  of  reasoning  in  the  pages  of  Thornton  and  Mill.  It 
is  the  denial  of  a  definite  wages  fund  which  marks  most 
signally  the  new  phase  on  which  the  discussion  now  en- 
tered. This  first  objection  is  the  beginning  of  a  long 
series  of  similar  attacks  on  the  old  doctrine;  and  at  the 
same  time  it  hinges  directly  on  what  Mill  and  other  of 
Longe's  immediate  predecessors  had  said. 

Longe  denies  that  there  is  "a  definite  fund,  distinct 
from  the  general  wealth,  destined  for  the  purchase  of  la- 
bour." He  has  a  brief  word  of  criticism  on  Mill's  two  funds, 
of  "  capital  "  for  productive  laborers,  and  "  unproductive  " 
funds  for  servants  and  the  like ;  but  like  Mill,  gives 
attention  chiefly  to  the  analysis  and  definition  of  capital. 
He  denies  that  it  is  intention  which  determines  whether  a 
given  portion  of  wealth  shall  be  capital  and  shall  be  used 
in  paying  wages.  He  quotes  passages  from  Mill,  and  from 
Fawcett,  Mill's  alter  ego,  in  which  the  intention  of  the 


LONGE— THORNTON— MILL— CAIRNES.  243 

owner  is  described  as  the  decisive  factor;  .and,  following 
the  more  obvious  meaning  of  these  passages,  conceives 
this  intention  to  be  applied  directly  to  the  money  and  po- 
tential money  proceeds  at  the  disposal  of  capitalists.  To 
treat  such  a  cause  as  decisive,  he  urges,  "excludes  the 
very  cause  which  in  real  life  governs  both  the  quantity  of 
wealth  which  is  from  time  to  time  used  as  capital,  and  the 
particular  mode  of  production  in  which  it  is  used."  That 
cause  is  "  the  existence  or  prospective  existence  of  a  pur- 
chaser." "  The  wealth  or  capital  available  for  the  main- 
tenance of  labour  "  is  not  the  fund  which  limits  wages ; 
"the  wealth  available  for  the  purchase  of  their  work  "  is 
the  real  fund.* 

This  reasoning  presents  itself  in  two  ways  :  negatively, 
as  to  Mill's  discussion  of  the  nature  and  limitation  of  the 
funds  available  for  the  immediate  employer  of  labor;  and 
positively,  as  to  the  real  sources  from  which  these  funds 
are  regularly  replenished.  The  replenishment,  according 
to  Longe,  comes  from  the  purchases  or  the  demand  of  the 
consumers  who  buy  the  articles  made.  Something  has 
already  been  said  as  to  this  phase  of  the  controversy ; 
something  more  will  be  said  of  it  when  we  take  up,  in  a 
later  chapter,  the  treatment  of  the  wages  fund  at  the  hands 
of  German  economists. f  The  welfare  of  any  particular 
set  of  laborers  depends  so  obviously  on  the  demand  for 
the  commodities  which  they  make,  that  the  same  force 
is  easily  inferred  to  apply  to  laborers  and  to  wages  at 
large;  and  Longe  could  find  a  sufficiency  of  respectable 
company  in  this  part  of  his  reasoning.  And  the  same 
may  be  said  of  the  negative  part, — of  that  which  is  con- 
cerned with  the  constitution  of  the  wages  fund,  the  rela- 
tion of  capital  to  wealth,  and  the  significance  of  the  capi- 


*  Longe,  pp.  37-47. 

f  See  Part  I,  Chapter  V,  pp.  106-109  ;  and  Chapter  XIII,  below. 


244 


WAGES  AND   CAPITAL. 


tal  of  the  immediate  employers.  Here  Longe  was  on 
much-trodden  ground;  and  what  he  said  on  these  topics 
connects  itself  most  directly  with  the  turn  which  the  con- 
troversy next  took. 

All  the  funds  which  serve  to  employ  laborers  are  con- 
stantly treated  by  Longe  in  terms  of  money  and  of  money 
value.  This  was  a  natural,  an  almost  inevitable,  result  of 
those  passages  in  Mill's  Political  Economy  which  were  no- 
ticed in  the  last  chapter.  Mill's  volumes  contained  the 
economic  gospel  of  the  day,  alike  for  the  faithful  and  the 
heretic.  Longe  had  read  and  re-read  the  chapters  which 
bore  directly  on  his  subject,  and,  not  being  versed  in  all 
the  phases  of  economic  discussion  that  bore  on  it  more 
remotely,  took  Mill's  words  in  their  simplest  and  most  ob- 
vious meaning.  For  him,  the  wages  fund  never  appeared 
in  any  other  light  than  that  of  funds  or  means  in  the 
hands  of  employers,  available  for  paying  immediate  money 
wages.  Hence  he  was  easily  led  to  deny  that  there  was 
any  fixity,  or  predetermination,  in  the  fund  ;  or  any  im- 
portance to  it  whatever.  The  farmer  is  limited  as  to  his 
payments  for  wages  "only  by  the  amount  of  money  for 
which  his  crops  or  stock  will  sell."  Employers,  we  are 
told,  really  pay  laborers  after  these  have  done  their  work  ; 
and  laborers  are  maintained  from  what  they  have  been 
paid  on  every  preceding  Saturday,  "or  from  what  they 
have  inherited  from  ancestors."  Coal  is  often  bought 
when  it  is  at  the  bottom  of  the  pit,  and  the  money  is  paid 
as  soon  as  the  coal  reaches  the  pit  bank  :  a  case  in  which 
laborers,  it  is  supposed,  clearly  need  not  get  their  wages 
from  capital.  So,  many  journeymen  are  paid  by  the  fort- 
night or  month,  while  the  employers  get  the  money  some 
days  before  they  pay  their  men.*  The  reader  conversant 
with  more  recent  discussions  of  capital  and  wages  will 

*  Longe,  pp.  48,  49,  53. 


LONGE— THORNTON— MILL— CAIRNES.  245 

find  here  some  familiar  suggestions.  To  repeat,  the  pres- 
entation by  Mill,  the  authority  of  the  day,  of  the  mode 
in  which  funds  of  capital  were  turned  over  to  laborers,  in- 
vited the  sort  of  attack  which  Longe  made. 

Substantially  the  same  view  as  that  of  Longe  was 
adopted  by  another  writer,  whose  position  may  be  briefly 
referred  to  as  another  indication  of  the  turn  which  the 
controversy  was  taking.  Henry  D.  Macleod  published  in 
1873  his  Principles  of  Economical  Philosophy*  Like  his 
other  writings,  this  book  had  weight  and  value  for  the 
elucidation  of  the  phenomena  of  credit  and  banking;  but 
on  the  general  principles  of  economics,  Macleod  had  not 
much  to  say  that  gained  or  deserved  a  great  deal  of  at- 
tention. As  to  the  wages  fund,  he  quoted  with  approval 
Longe's  proposition  that  purchasers'  demand  determined 
the  amount  that  would  be  paid  in  wages;  but,  for  himself, 
laid  most  stress  on  the  effect  of  credit  in  enlarging  the 
sums  that  can  be  paid  out  to  laborers.  Here  the  concep- 
tion of  the  source  of  wages  as  simply  money  funds  ap- 
pears in  the  most  unequivocal  form.  "  Thus  we  see  that 
the  true  '  wages  fund  '  is  not  the  actual  amount  of  specie 
in  the  manufacturer's  pocket,  but  the  price  which  the  con- 
sumers pay  for  the  complete  product.  And  how  is  this  to 
be  obtained  before  it  is  actually  received  ?  By  means  of 
Banking  Credits.  This  is  the  precise  use  and  function  of 
Banks  which  issue  notes.  It  is  to  issue  notes  to  form  this 
'  wages  fund  '  in  anticipation  of  the  price  paid  by  the  con- 
sumers. And  thus  we  see  the  gigantic  importance  of  a 
solid  banking  system  to  the  labouring  classes.  It  multi- 
plies the  '  wages  fund  '  a  hundredfold.  .  .  ."  f 


*  This  book  was  mainly  a  new  edition  of  the  Elements  of  Political 
Economy,  published  in  1858. 

f  Macleod's  Principles  of  Economical  Philosophy,  vol.  ii,  ch.  xiii,  pp. 
126,  127.  As  to  the  direction  in  which  such  arguments  as  these  of  Mac- 


246  WAGES  AND  CAPITAL. 

Precisely  the  same  point  of  attack  as  Longe's  was  also 
chosen  by  William  Thomas  Thornton,  a  writer  who  was  of 
the  inner  circle  among  the  reigning  economists,  a  close 
friend  of  Mill's,  well  known  by  earlier  publications,  and  in 
every  way  able  to  command  an  attentive  hearing.  Thorn- 
ton published  in  1869  *  his  book  On  Labour  :  Its  Wrongful 
Claims  and  Right/ id  Dues,  Its  Actual  Present  and  Possible 
Future.  His  predecessor  Longe  is  not  referred  to  in  the 
book,  and  very  likely  was  not  known  to  Thornton  ;  yet 
both  on  the  law  of  supply  and  demand  as  affecting  wages, 
and  on  the  determinateness  of  the  wages  fund,  he  might 
have  got  hints  from  Longe.  The  supply  and  demand  dis- 
cussion, which  was  much  the  more  prominent  in  Thorn- 
ton, we  may  still  postpone  for  a  moment,  in  order  to  fol- 
low without  a  break  that  as  to  the  nature  and.  limit  of  the 
wages  fund. 

Thornton  never  thought  of  denying  that  wages  were 
paid  from  capital.  Nor,  for  that  matter,  had  Longe  done 
so  explicitly;  though  some  of  his  objections,  carried  to 
their  logical  outcome,  must  have  involved  such  a  denial. 
But  Thornton,  quite  as  explicitly  as  Longe,  conceived  this 
fund  of  capital  to  be  money  means  wholly  in  the  posses- 
sion of  the  immediate  managers  and  employers  of  the 
laborers.  Naturally  he  concluded  at  once  that,  as  such, 
it  was  not  a  fixed  or  inelastic  fund.  He  was  brief  on  this 
part  of  the  subject,  but  none  the  less  clear: 

"  Determinateness  or  indeterminateness  is  the  one  point  of  dif- 
ference between  those  who  affirm  and  those  who  deny  the  wages 
fund.  ...  If  there  really  were  a  national  fund  the  whole  of  which 
must  necessarily  be  applied  to  the  payment  of  wages,  that  fund 
could  be  no  other  than  an  aggregate  of  smaller  similar  funds  pos- 


leod's  are  pertinent,  compare  what  was  said  above,  Part  I,  Chapters  III 
.and  IV,  pp.  63-65.  83-85. 

*  The  preface  to  the  first  edition  is  dated  Dec.  31,  1868. 


LONGE— THORNTON— MILL— CAIRNES.  247 

sessed  by  the  several  individuals  who  compose  the  employing  class  of 
the  nation.  Does,  then,  any  individual  possess  such  a  fund  ?  .  .  . 
Of  course,  every  employer  possesses  a  certain  amount  of  money, 
whether  his  own  or  borrowed,  out  of  which  all  his  expenses  must 
be  met,  if  met  at  all.  ..."  * 

and  Thornton  goes  on  to  ask  whether  the  employer  may 
not  spend  more  or  less  for  a  dozen  different  purposes, — 
on  his  family,  on  buildings,  on  repairs.  The  whole  in- 
quiry rests  on  the  assumption  that  the  money  funds  of  the 
employers  constitute  the  real  and  important  capital  ap- 
plied to  the  payment  of  wages;  and  on  such  an  assump- 
tion, he  remarks,  truly  enough,  that  "  it  sounds  like  mock- 
ery or  childishness  to  ask  these  questions." 

To  this  attack,  Mill  surrendered.  He  reviewed  Thorn- 
ton's book  in  the  Fortnightly  Review  for  May,  1869,  ac- 
cepted Thornton's  version  of  the  question  in  dispute,  and 
admitted  that  his  objections  were  unanswerable.  "The 
capitalist,"  says  Mill,  "  starts  at  the  commencement  with 
the  whole  of  his  accumulated  means,  all  of  which  is  poten- 
tially capital."  Doubtless  Mill  had  in  mind  here  the  com- 
mon definition  of  capital,  as  set  forth  in  his  own  volumes: 
it  depended  on  the  intention  of  the  owner.  Thence  he 
might  have  reasoned,  looking  merely  at  the  money  means 
of  immediate  employers,  that  there  could  be  no  wages 
fund  distinct  from  any  of  the  other  possessions  of  the 
capitalist.  Yet  some  thought  of  real  capital,  and  of  the 
irrevocable  commitment  of  at  least  some  part  of  it  to 
other  things  than  wages  fund,  seems  to  have  remained  in 
his  mind;  for  the  flexible  element,  which  makes  him  con- 
cede that  the  wages  fund  is  an  indeterminate  thing,  is 
found  by  considering,  not  all  the  possessions  of  the  em- 
ployer, but  certain  available  funds  or  uncommitted  assets. 
How  much  he  shall  advance  to  laborers,  how  much  expend 

*  On  Labour,  pp.  84,  85. 


248  WAGES  AND  CAPITAL. 

for  himself  and  his  family,  is  undetermined  and  free. 
"There  is  no  law  of  nature  making  it  inherently  impos- 
sible for  wages  to  rise  to  the  point  of  absorbing  not  only 
the  funds  he  intended  to  devote  to  carrying  on  his  busi- 
ness, but  the  whole  of  what  he  allows  for  his  private  ex- 
penses, beyond  the  necessaries  of  life."  Here  again  it  is 
difficult  to  make  out  exactly  what  Mill  was  thinking  of. 
It  may  be  some  version  of  the  old  doctrine  of  capital  as 
fixed  by  intention  ;  or  an  echo  of  the  Ricardian  doctrine 
that  all  capital  was  resolvable  into  advances  of  wages  ; 
or  simply  the  naked  case  of  the  individual  capitalist  and 
his  possible  expenditure  of  money.  At  all  events,  it  was 
the  last  mentioned  that  was  uppermost.  In  the  Political 
Economy,  as  we  have  seen,  Mill  had  sometimes  considered 
food,  clothes,  shelter,  as  constituting  the  wages  part  of 
circulating  capital;  sometimes  had  spoken  of  "funds" 
or  "  income  "  or  cash.  Here  the  latter  view  is  taken  un- 
equivocally. The  surrender  of  the  rigid  wages  fund  then 
becomes  inevitable.  The  result  is  not  satisfactory  to  one 
who  would  follow  Mill's  own  advice  of  disregarding  the 
outward  mechanism  of  paying  and  spending,  and  attend- 
ing to  the  realities  of  the  phenomena.*  Longe  and 
Thornton  had  gone  astray,  in  a  direction  which  Mill  him- 
self, consciously  or  unconsciously,  had  pointed  to  in  the 
Political  Economy.  Now  he  followed  them  into  hopeless 
confusion  between  real  capital  and  real  wages  on  the  one 
hand,  and  the  money  mechanism  of  nominal  wages  on  the 
other. 

The  explanation  of  Mill's  loose  thought  and  hasty  sur- 
render is  not  far  to  seek.  Personal  regard  for  Thornton 
probably  counted  for  something  :  he  was  disposed  to  make 
every  possible  concession  to  his  old  friend.  But  the  main 
cause  was  a  change  in  his  interests  and  sympathies,  which 

*  See  above,  p.  232. 


LONGE-THORNTON— MILL— CAIRNES. 

led  him  to  get  quit  of  the  wages  fund  discussion  as  prompt- 
ly as  possible.  In  his  later  years,  social  problems,  in  their 
bearing  on  the  wider  questions  of  philosophy  and  ethics, 
engrossed  his  attention  more  and  more.  By  far  the 
larger  part  of  the  review  of  Thornton  is  given  to  the 
ethical  aspects  of  trade-unionism,  the  other  topics  being 
passed  over  with  a  comparatively  light  touch.  He  cared 
much  more  for  the  right  and  wrong  of  trade-unionism,  as 
tested  by  some  final  standard,  than  for  the  mechanism  of 
market  wages  and  the  elasticity  of  the  wages  fund. 

No  doubt,  too,  another  circumstance  helps  to  account 
for  his  ready  acceptance  of  Thornton's  version  and  refu- 
tation of  his  older  doctrine.  He  had  himself  never 
stopped  to  consider  that  doctrine  with  much  care.  We 
have  seen  how  briefly  he  had  stated  it  in  the  Political 
Economy,  and  how  ambiguously  he  had  applied  it.  When 
he  was  confronted  by  Thornton's  objections,  he  had  no 
well-defined  views  of  old  standing  to  fall  back  on  ;  and 
he  was  too  much  interested  in  the  larger  social  questions, 
perhaps  was  too  old,  to  overhaul  the  whole  theory  of 
wages  and  capital  from  its  foundations.  On  other  topics 
— thus  on  the  law,  or  equation,  of  supply  and  demand, 
which  we  shall  presently  consider — he  had  reached  clearer 
thought  in  his  younger  days,  and,  not  being  taken  un- 
awares, was  able  to  weigh  Thornton's  objections  more 
critically.  On  the  wages  fund  doctrine,  he  had  no  ac- 
cumulation of  critical  thought  to  draw  on. 

The  law  or  equation  of  supply  and  demand,  just  re- 
ferred to,  occupied  much  space  in  this  discussion.  As  we 
have  noted,  Longe  and  Thornton  had  found  it  necessary 
to  say  something  on  the  bearing  of  supply  and  demand 
on  wages  and  the  wages  fund.  Mill  did  the  same  ;  though 
he  yielded  less  to  Thornton  here  than  on  the  nature  and 
elasticity  of  the  fund.  The  controversy  branched  off  into 


250 


WAGES  AND  CAPITAL. 


fields  somewhat  beyond  the  scope  of  the  present  inquiry ; 
but  some  review  of  this  phase  of  it  may  be  advantageous. 
Longe  had  begun  by  questioning  whether  the  general 
law  of  supply  and  demand  had  anything  to  do  with 
wages  and  the  wages  fund.  He  had  no  difficulty  in  show- 
ing that  the  writers  then  in  vogue,  and  more  especially 
Mill  and  Fawcett,  supposed  that  law  to  be  in  point:  they 
conceived  of  the  immediate  determination  of  wages  as 
being  a  simple  application  of  supply  and  demand.  Ri- 
cardo  long  ago  had  set  the  example  of  distinguishing  be- 
tween market  and  natural  wages :  market  wages  being 
determined  by  the  ratio  of  capital  to  population,  and 
natural  wages  by  their  "cost," — /.  <?.,  by  the  price  of  food, 
or  the  quantity  of  labor  given  to  the  production  of  a 
given  quantity  of  food.  His  successors  had  worked  out 
a  neat  and  harmonious  formula,  applicable  alike  to  labor 
and  to  commodities:  supply  and  demand  determined 
marked  or  temporary  rates,  while  cost  determined  natural 
or  permanent  rates.  Mill  had  given  precision  to  the 
phrases  about  supply  and  demand  by  putting  the  law  in 
the  form  of  an  equation  :  quantity  demanded  varies  with 
prices,  and  price  must  be  such  that  quantity  demanded 
equals  quantity  supplied.*  Longe  questioned  the  real 
working  of  the  principle  even  in  this  version ;  but  he 
maintained  that  in  any  case  the  wages  fund  theory  alleged 
a  relation  between  supply  and  demand  very  different  from 
that  set  forth  in  Mill's  equation.  Under  the  wages  fund 
doctrine,  demand  in  relation  to  labor  means  quantity  of 
capital  offered,  not  quantity  of  labor  demanded.  The 
ratio  or  equation  is  the  simple  one  of  comparing  a  given 
quantity  of  offered  capital  with  a  given  quantity  of  labor 
in  the  market,  and  not  the  more  complex  one  of  ascer- 

*  See   the   familiar   passage  in   the  Political  Economy,   Book  III, 
ch.  ii,  g  4. 


LONGE— THORNTON— MILL— CAIRNES. 


251 


taining  at  what  price  the  quantity  demanded  of  labor  will 
be  equal  to  the  quantity  that  happens  to  be  supplied. 

Thornton,  like  Longe,  found  it  necessary  to  analyze 
the  phrases  about  supply  and  demand  which  formed  the 
whole  of  the  philosophy  of  wages  for  Cobden  and  the 
public  at  large,  and  were  used  by  the  economists  in  a  way 
not  much  less  superficial.  Unlike  Longe,  who  had  taken 
up  this  topic  very  much  by  the  way,  Thornton  took  it  up 
deliberately  and  systematically,  and  tried  his  hand  at  a 
complete  restatement  of  the  law  of  supply  and  demand. 
We  need  not  follow  the  intricacies  of  his  reasoning  about 
supposed  cases  of  horses  at  one  price  and  another,  of  corn 
and  gloves,  Dutch  auctions  and  so  on.  With  the  applica- 
tion of  the  principle  of  marginal  utility,  this  whole  phase 
of  economic  theory  has  become  much  simplified.  Mill's 
equation  of  demand  and  supply  is  stated  in.  better  terms, 
and  with  fuller  considation  of  all  the  elements  involved, 
in  the  now  familiar  proposition  that  price  depends  on  mar- 
ginal utility.  Mill  himself,  in  admitting  the  justice  of 
some  of  Thornton's  criticisms,  pointed  out  that  one  im- 
portant condition  had  not  been  mentioned  in  the  Po- 
litical Economy,  which  yet  must  be  present  if  the  equation 
of  demand  and  supply  is  to  fix  price  at  a  definite  point. 
Quantity  demanded  must  vary  with  price  continuously. 
The  same  condition,  it  is  clear,  must  be  present  if  the 
modern  version  of  the  law  of  demand  and  supply  is  to 
bring  a  determinate  answer.  If  marginal  utility  is  to  fix 
price  without  a  range  of  possible  variation,  each  added 
increment  of  the  article  offered  must  have  a  less  utility 
than  the  portion  preceding  it.  These  are  now  common- 
places;  they  make  Thornton's  discussion  antiquated,  and 
leave  Mill's  significant  only  as  showing  that,  on  topics 
which  he  had  stopped  to  think  over  with  care,  he  reasoned 
with  severe  accuracy. 

For  the  subject  of  the  present  volume,  this  general 


252 


WAGES   AND   CAPITAL. 


discussion  is  pertinent  because  it  shows  both  Mill  and 
Thornton  following  in  the  path  which  Longe  had  declared 
to  be  the  wrong  one  :  approaching  wages  and  wages  fund 
as  a  narrower  problem  within  the  larger  one  of  demand 
and  supply  in  general.  And  here  Longe  was  right.  Mill's 
equation  of  supply  and  demand  assumes  a  demand,  or 
quantity  offered,  which  varies  with  the  price  of  the  thing 
on  sale.  Supply  is  supposed  to  be  given  ;  demand,  in  the 
sense  of  quantity  offered,  is  uncertain.  The  problem  then 
is,  at  what  price  the  whole  supply  will  be  carried  off.  But 
in  the  version  of  the  wages  fund  doctrine  which  was  then 
current,  both  supply  and  demand  were  fixed.  Supply  was 
the  number  of  laborers  ;  demand  was  the  quantity  of  capi- 
tal, or  of  circulating  capital.  Bring  the  two  together,  and 
the  average  or  general  rate  of  wages  must  be  the  result. 

This  difference  between  the  strict  wages  fund  doctrine 
and  the  general  law  of  supply  and  demand  may  be  made 
more  clear  by  considering  another  case  of  a  similar  sort, 
where  also  the  usual  formula  of  demand  and  supply  was 
applied,  and  yet  was  inapplicable.  The  proposition  that 
the  value  of  money  varies  inversely  with  its  quantity  was 
traditionally  presented  by  the  classic  writers  as  an  ordi- 
nary case  of  the  working  of  demand  and  supply.  The 
permanent  or  natural  value  of  money  (/'.  <?.,  of  specie)  was 
supposed  to  be  determined  by  its  cost  of  production  ;  its 
market  or  temporary  value,  by  demand  and  supply.  Sup- 
ply was  the  total  quantity  of  money,  due  account  being 
taken  of  "its  rapidity  of  circulation,"  or  the  quantity  in 
use  for  purchases  at  any  moment.  Demand  for  money 
consisted  of  all  the  commodities  on  sale.  Clearly,  de- 
mand here  was  a  thing  fixed  from  the  start,  not  a  thing 
varying  as  the  rate  at  which  the  money  was  offered  might 
be  high  or  low.  The  value  of  money  was  determined  in 
the  simplest  way  possible  :  divide  the  total  of  money  by 
the  total  of  commodities.  That  the  operation  of  demand 


LONGE— THORNTON— MILL— CAIRNES. 


253 


and  supply  as  to  money  was  peculiarly  simple,  had  been 
pointed  out  often  enough,  most  clearly  by  Mill  himself. 
He  had  none  the  less  presented  demand  and  supply,  or 
the  play  of  forces  that  fixed  the  "  market  "  value  of  money, 
as  analogous  to  the  play  of  forces  that  determined  the 
value  of  individual  commodities  at  any  moment:  whereas 
the  two  cases  differ  in  essentials.  Needless  to  say,  we  are 
not  concerned  here  with  the  truth  or  untruth  of  the  quan- 
tity theory  of  money.  Its  treatment  by  Mill  and  his  con- 
temporaries, whether  right  or  wrong,  shows  that  even 
on  a  subject  which,  like  the  theory  of  money,  had  re- 
ceived their  deliberate  attention,  they  made  an  indiscrim- 
inating  use  of  the  formula  of  supply  and  demand  as  the 
universal  determinant  of  "  market  "  values.  Naturally, 
they  did  the  same  with  regard  to  the  wages  fund,  which 
had  rarely  received  deliberate  attention.  In  strictness, 
the  theory  of  their  wages  fund  was  like  that  of  general 
prices.  Demand  and  supply,  that  is,  capital  and  popula- 
tion, were  both  at  any  given  time  fixed  :  there  was  no 
play  for  a  varying  demand  and  no  possibility  of  more 
than  one  point  of  equilibrium. 

Mill,  as  we  have  seen,  was  brought  to  admit  the  inde- 
terminateness  and  the  elasticity  of  the  wages  fund,  in  the 
sense  of  money  funds  available  for  the  direct  employers. 
Hence  he  accepted,  in  some  degree,  the  criticisms  which 
Longe  and  Thornton  made,  in  different  ways,  on  his 
former  off-hand  application  of  demand  and  supply  to  the 
problem  of  market  wages.  He  agreed  with  Thornton  so 
far  as  to  admit  that  here  was  a  case  where  more  than  one 
point  of  equilibrium  in  the  equation  of  demand  and  sup- 
ply was  possible,  and  where  therefore  no  certainty  ex- 
isted that  one  rate  or  another  should  emerge  from  the 
forces  directly  in  operation.  It  followed  that  workmen 
might  get  better  terms, — higher  wages, — by  means  of 
combinations  and  strikes,  than  they  could  get  otherwise  : 


254 


WAGES   AND   CAPITAL. 


and  thus  Mill  was  led  to  the  question  which  he  had  most 
at  heart,  the  right  and  wrong  of  trades-unionism.  The 
theoretical  and  more  strictly  economic  questions  as  to  de- 
mand and  supply,  like  those  as  to  the  nature  and  limita- 
tion of  the  wages  fund,  received  but  a  scant  and  unsatis- 
factory examination  at  his  hands. 

In  truth,  it  may  be  questioned  whether,  under  any 
form,  an  analogy  can  be  usefully  drawn  between  the  im- 
mediate forces  determining  the  general  rate  of  wages,  and 
the  immediate  causes  determining  the  price  of  this  or  that 
commodity.  Needless  to  say,  a  connection  does  exist  be- 
tween the  causes  that  determine  the  wages  of  any  one 
class  of  laborers  and  those  that  determine  the  prices  of 
the  commodities  they  make.  Making  allowance — often  it 
must  be  a  large  allowance — for  the  friction  caused  by  the 
position  of  employers  as  middlemen  between  laborers  and 
consumers,  we  may  say  that  the  play  of  demand  and  sup- 
ply in  determining  prices  also  determines  proximately  the 
share  in  general  wages  which  shall  go  to  one  set  of  labor- 
ers or  another.  But  this  belongs  to  the  problem  of  par- 
ticular wages,  not  to  that  of  general  wages.  As  to  gen- 
eral wages,  Mill  had  come  to  the  conclusion  that  the 
money  funds  which  constitute  the  proximate  demand  for 
labor  were  indeterminate.  We  may  go  further,  and  admit 
that  there  is  elasticity  not  only  as  to  the  money  funds 
which  go  to  hired  laborers,  but  as  to  the  consumable  com- 
modities which  go  to  the  laborers.  Yet  the  variations 
which  take  place  in  the  money  wages  or  the  real  wages 
which  may  be  turned  over  to  laborers  at  large,  present 
but  a  loose  analogy  to  the  changes  in  prices  of  commo- 
dities under  the  play  of  the  motives  analyzed  in  the  doc- 
trine of  marginal  utility.  There  is  no  sign  of  that  con- 
tinuous diminution  of  utility  with  each  increment  offered 
the  purchasers,  which  is  of  the  essence  of  the  law  of  de- 
mand and  supply  as  to  commodities.  In  the  concrete 


LONGE— THORNTON— MILL— CAIRNES.  255 

world,  the  expectations  and  calculations  of.  the  employing 
class,  the  manoeuvres  and  combinations  of  laborers,  a  con- 
fused medley  of  causes  acting  in  multiform  ways,  may 
bring  about  in  any  one  season  a  greater  or  less  of  total 
wages,  always  within  those  limits  of  predetermination 
which  have  been  elsewhere  set  forth.*  Here  we  have 
phenomena  of  a  sort  that  do  not  readily  reduce  them- 
selves to  any  rule,  or  fit  into  any  general  law  of  value. f 

Fairly  weighed,  Mill's  review  of  Thornton  thus  marks 
no  real  advance  in  the  discussion.  The  curious  accept- 
ance of  reasoning  by  which  the  wages  fund  is  supposed  to 
be  made  up  by  the  money  means  of  the  immediate  em- 
ployers, rendered  it  unfruitful  as  to  the  really  difficult 
question  at  issue.  The  discussion  of  demand  and  supply 
added  little  to  what  Mill  had  said  in  the  Political  Economy, 
and  certainly  made  no  helpful  application  of  old  views  or 
new  ones  on  the  topic  in  hand.  Even  on  that  question  of 
the  right  and  wrong  of  trade-unionism,  which  now  chiefly 

*  Compare  what  was  said  in  Part  I,  Chapter  IV,  pp.  82-94. 

f  Possibly,  in  an  analysis  of  the  succession  of  advances  made  to  labor- 
ers over  a  long  series  of  years,  a  general  formula  of  demand  and  supply, 
or  of  final  utility,  may  be  applicable.  Over  a  whole  lengthened  cycle  of 
production,  and  in  view  of  the  total  advances  made  during  the  cycle,  it 
may  be  helpful  to  conceive  of  successive  increments  of  capital  as  turned 
over  to  laborers,  each  with  less  and  less  utility  for  the  capitalists  as  there 
are  repetitions  of  the  process.  This  mode  of  approaching  the  problem 
of  the  return  to  capital  was  suggested  by  Jevons,  and  has  been  followed 
with  various  modifications,  by  other  writers  since  his  time.  But  obvious- 
ly it  is  applicable  only  to  the  problem  of  the  final  division  of  the  proceeds 
of  a  complete  productive  cycle,  not  to  the  narrower  question  of  "  market  " 
wages  which  is  the  essence  of  the  wages  fund  problem.  At  best,  I  sus- 
pect that  this  mode  of  approaching  the  general  problem  of  capital  and 
interest,  and  so  of  wages,  needs  to  be  both  amplified  and  qualified  before 
it  can  yield  a  sufficient  explanation  of  the  realities  of  industrial  life. 
Like  the  older  formulae  of  the  classic  writers,  it  brings  a  temptation  to  be 
content  with  large  general  principles,  and  a  danger  that  their  concrete 
application  shall  suffer  neglect. 
IS 


256 


WAGES   AND   CAPITAL. 


appealed  to  him,  Mill  simply  applied  the  familiar  formula 
of  his  utilitarianism.  Had  it  not  been  for  the  brief  and 
summary  recantation  of  a  form  of  the  wages  fund  doc- 
trine which  he  had  never  really  maintained,  this  paper 
would  have  had  no  prominent  place  in  his  economic  or 
philosophic  writings. 

The  next  important  step  in  the  controversy  was  taken 
by  John  Eliot  Cairnes.  A  year  or  two  after  Thornton  and 
Mill  had  threshed  the  matter  over,  and  almost  immediately 
after  Mill's  death,  Cairnes  published  his  volume  on  Some 
Leading  Principles  of  Political  Economy,  Neivly  Expounded* 
As  the  title  indicates,  it  is  an  attempt  at  a  restatement 
and  modification  of  more  than  one  part  of  the  economic 
theory.  The  rate  of  wages  is  the  subject  of  the  second 
book  ;  the  passages  pertinent  to  the  present  inquiry  being 
partly  in  the  opening  chapter,  which  considers  the  theory 
of  wages  directly,  and  partly  in  the  later  chapters  on 
Trade-Unionism,  which  apply  and  illustrate  the  theoretic 
conclusions. 

As  to  the  nature  and  constitution  of  the  wages  fund, 
Cairnes  goes  at  the  matter  virtually  in  the  same  way  as 
Longe  and  Thornton  and  Mill.  The  case  of  the  indi- 
vidual employer  and  the  means  at  his  command  are 
analyzed. 

"Why  does  A.  B.  employ  his  wealth  in  productive  operations? 
and  why  does  he  employ  so  much  and  no  more  in  productive  opera- 
tions ?  .  .  .  This  point  having  been  settled,  he  has  yet  to  consider 
in  what  proportions  the  amount  shall  be  divided  between  Fixed 
Capital,  Raw  Material,  and  Wages.  What  is  to  prescribe  the  re- 
spective quotas  ?  Manifestly,  in  the  first  place,  the  nature  of  the 
industry  in  which  he  proposes  to  embark  his  capital.  .  .  .  Now  the 

*  London,  1874.  The  preface  is  dated  March,  1874.  Mill  na(l  died  in 
1873- 


LONGE— THORNTON— MILL— CAIRNES.  257 

considerations  which  weigh  with  the  individual  capitalist  are  those 
which  weigh  with  a  community  of  capitalists  ;  and  we  are  therefore 
justified  in  concluding  that  the  main  circumstance  governing  the 
proportion  which  the  wages  fund  shall  bear  to  the  general  capital 
of  a  nation  is  the  nature  of  the  national  industries."  * 

This  clearly  rests  on  the  assumption  that  the  fund  for 
paying  wages  is  held  by  the  capitalists  who  directly  em- 
ploy labor,  and  that,  in  Thornton's  language,  it  can  be 
"no  other  than  an  aggregate  of  smaller  similar  funds  pos- 
sessed by  the  several  individuals  who  compose  the  em- 
ploying class  of  the  nation."  f 

The  same  assumption  is  made  more  specifically  when 
Cairnes  goes  on  to  examine  further  in  what  manner  capi- 
tal is  divided  into  its  three  constituent  parts  of  Fixed 
Capital,  Raw  Material,  and  Wages.  A  capitalist  starts 
with  ,£10,000  ;  with  ,£5,000  he  can  buy  fixed  capital  and 
raw  material,  with  the  other  ,£5,000  he  can  employ  100 
workmen  at  ,£50  a  year.  This  example  might  indeed  be 
supposed,  if  it  stood  alone,  to  be  merely  illustrative,  and 
not  meant  to  give  a  literal  account  of  the  where  and  what 
of  the  wages  fund.  But  Cairnes  uses  it  as  perfectly  signif- 
icant of  the  details  and  realities  of  things  ;  for  he  proceeds 
at  once  to  draw  from  the  supposition  as  to  employers' 
means  in  hand,  a  general  conclusion  of  importance.  Some 
simple  arithmetic  applied  to  the  ,£10,000  shows  that  if 
laborers  are  plenty,  a  less  proportion  of  the  cash  can  go 
to  wages,  and  a  larger  proportion  will  be  needed  to  fur- 
nish the  plant  and  materials  required  to  keep  the  many 
laborers  busv.  The  details  of  this  odd  bit  of  reasoning,  and 


*  Leading  Principles,  Book  II,  ch.  i,  §  8.  The  first  two  of  the  ex- 
tracts here  quoted  are  separated  by  a  page  or  two  in  Cairnes's  text  ;  but 
they  are  parts  of  a  continuous  thread  of  reasoning. 

f  See  the  passage  as  quoted  above,  p.  246.  Cairnes  later  quotes  the 
same  passage  from  Thornton. 


258  WAGES   AND   CAPITAL. 

its  validity,  are  not  of  great  significance ;  what  is  important 
for  the  present  subject  is  the  use  of  the  money  illustra- 
tion as  a  means  of  drawing  large  conclusions.  Cairnes 
generalizes  from  it  to  the  effect  that  the  larger  the  supply 
of  labor,  the  smaller  the  proportion  of  wages  fund  to 
other  sorts  of  capital.  The  outcome  of  his  reasoning  is 
finally  stated  thus  :  "  Our  analysis  accordingly  issues  in  the 
following  conditions  as  the  determining  causes  of  the 
Wages  Fund,  viz. :  the  total  capital  of  the  country  ;  the 
nature  of  the  national  industries  ;  and  the  supply  of  la- 
bor,"— a  conclusion  which  rests  simply  on  an  analysis  of 
the  mode  in  which  an  individual  employer  would  be  likely 
to  use  his  money  means. 

Cairnes,  as  was  just  noted,  divided  capital  into  three 
parts, — fixed  capital,  raw  materials,  and  wages  fund.  He 
thus  got  rid  of  the  phrase  "circulating  capital,"  which 
Ricardo  and  his  followers  had  often  used  to  denote  that 
part  of  capital  which  was  "  destined  to  the  maintenance 
of  labor."  But  the  change  was  one  of  language  rather 
than  of  substance.  Like  his  predecessors,  Cairnes  failed 
to  keep  clearly  in  mind  the  distinction  between  the  real 
wages  fund  of  commodities,  and  the  money  funds  of  the 
immediate  employers  ;  or  rather,  he  neglected  the  former 
almost  entirely.  The  threefold  division  was  indeed  made, 
in  terms,  with  reference  to  the  capital  of  the  community 
at  large ;  but  when  Cairnes  preceded  to  any  detailed 
reasoning  as  to  the  wages  fund  part,  he  gave  attention 
solely  to  employers  and  to  the  money  means  they  dis- 
pose of. 

Reasoning  so,  how  could  Cairnes  maintain  that  the 
wages  fund  was  in  any  way  fixed  ?  that  the  employer 
could  not  borrow,  or  retrench  on  his  personal  expendi- 
ture ?  Within  a  few  pages  of  the  passages  just  quoted,  in 
which  the  wages  fund  is  described  in  terms  of  cash,  he 
turned  to  Thornton's  questions  as  to  the  determinateness 


LONGE— THORNTON— MILL— CAIRNES. 


259 


of  the  fund,  and  might  fairly  have  been  expected  to  answer 
them  directly.  He  did  not  do  so.  He  then  changed  the 
point  of  view;  found  it  needful  to  enter  on  an  explanation 
of  a  larger  and  wider  question, — the  nature  of  economic 
laws;  and  at  last  came  back  to  answer  Thornton  by  set- 
ting forth,  not  whether  the  wages  fund  was  determinate, 
but  in  what  sense  there  was  an  economic  law  which  made 
it  indeterminate  within  limits.* 

As  to  the  nature  of  economic  law,  and  the  kind  of  de- 
termination which  it  may  be  expected  to  bring  about, 
Cairnes  wrote  justly  and  truly.  "What  an  economic  law 
asserts  is,  not  that  men  must  do  so  and  so,  whether  they 
like  it  or  not,  but  that  in  given  circumstances  they  will 
like  to  do  so  and  so;  that  their  self-interest  or  other  feel- 
ings will  lead  them  to  this  result."  The  application  of 
economic  law  in  this  sense  to  the  wages  fund  was  that  the 
habits  and  desires  of  capitalists  would  lead  them  to  main- 
tain accumulation  and  investment  at  a  certain  rate.  In- 
dividual capitalists  might  cut  down  wages  and  swell  their 
private  expenditure ;  but,  "  the  character  of  the  wealthy 
classes  remaining  on  the  whole  what  it  is,  increased  accu- 
mulations in  other  quarters  would  neutralize  exceptional 
extravagance  in  some."  The  disposition  to  accumulate 
being  thus  fixed,  a  certain  proportion  of  the  sums  invested 
must  (Cairnes  italicizes  the  word)  go  to  wages.  At  the 
root  of  the  argument  we  find  the  theory  of  what  Mill 
called  the  effective  desire  of  accumulation, — that,  with  a 
given  return  to  capital,  accumulation  will  be  maintained; 
and  so  a  determination  and  even  predetermination  of  a 
certain  amount  of  capital  to  wages. 

This  is  familiar  doctrine :  that  high  profits  increase 
accumulation,  low  profits  check  it.  But  it  does  not  apply 
to  wages  hie  et  mine.  Without  stopping  to  inquire  just 


See  §  ii  of  the  chapter  just  cited. 


26o  WAGES   AND   CAPITAL. 

how  accurately  and  promptly  accumulation  in  fact  re- 
sponds to  a  rise  or  fall  in  the  return  to  capital,  we  may 
be  sure  that  the  process  takes  some  years  at  least  to  work 
itself  out.  Clearly  the  old  version  was  that  this  factor 
had  nothing  to  do  with  "  market  "  wages.  At  any  given 
time,  according  to  Ricardo  and  all  the  array  of  the  English 
writers  down  to  Cairnes's  time,  it  was  the  ratio  of  capital 
to  population  that  determined  wages.  If  high  profits 
were  the  result,  more  capital  would  be  accumulated,  and 
after  a  space  wages  would  rise :  but  only  after  a  space. 
Economic  laws  acting  through  the  desire  of  capitalists  to 
reap  high  returns, — "  covetousness  held  in  check  bycovet- 
ousness,"  as  Cairnes  himself  elsewhere  expressed  it, — per- 
haps determined  wages  in  a  cycle  of  years.  But  here  was 
no  answer  to  Thornton's  question  :  was  the  wages  fund  at 
any  given  time  or  at  any  given  season  determinate  or  in- 
determinate ? 

Thornton  put  his  question  by  asking  how  the  funds  of 
capitalists  Smith  and  Jones  were  determined.  Cairnes 
also,  when  he  tried  to  restate  the  doctrine,  asked  how  the 
funds  of  A.  B.  would  be  distributed  and  used.  But  when 
he  came  to  answer  Thornton's  question,  he  set  up  a  differ- 
ent kind  of  "determination":  one  that  was  settled  not 
once  for  all  this  season,  but  after  a  while  through  slow- 
working  causes.  Thornton  would  have  admitted  freely, — 
indeed  did  admit, — what  Cairnes  said  about  capital  and 
accumulation  and  profits.  He,  too,  maintained  that  in 
the  end  high  profits  stimulate  accumulation  and  increase 
wages;  and,  conversely,  that  low  profits  check  accumula- 
tion and  in  the  end  lower  wages.  But  Thornton  asked 
whether  there  was  not  flexibility  in  the  funds  immediately 
available  for  paying  wages,  and  whether  trade-unions 
could  not  squeexe  from  the  employer  something  he  would 
not  otherwise  give;  ami  here  Cairnes,  with  his  rehabili- 
tated wages  fund,  did  not  squarely  meet  the  question. 


LONGE— THORNTON— MILL— CAIRNES.  26 1 

Cairnes  himself  had  in  mind  the  trade-unions,  and 
the  application  of  his  theory  to  their  doings.  Here  the 
point  of  view  just  described  is  even  more  distinctly  taken  : 
the  real  limits  to  the  action  of  trade-unions  being  found, 
not  in  any  rigid  wages  fund,  but  in  the  fact,  or  supposed 
fact,  that  profits  are  at  the  minimum  necessary  to  induce 
accumulation.  At  the  very  outset,  to  be  sure,  Cairnes 
notes  incidentally  that  there  are  certain  quasi-physical 
limits  to  the  wages  fund.  "  In  order  to  maintain  the  stock 
of  commodities  of  all  sorts  which  in  any  civilized  commu- 
nity goes  to  support  the  laboring  population,  a  certain 
large  proportion  of  the  general  wealth  must  exist  in  the 
form  of  fixed  capital  and  raw  material.  The  wealth  avail- 
able, therefore,  for  the  remuneration  of  labor  can  not  at 
the  utmost  be  more  than  the  balance  which  remains  after 
those  indispensable  requirements  have  been  provided  for, 
under  pain  of  complete  failure  of  the  fund."  *  This  is  not 
so  far  from  a  statement  of  the  true  question  as  to  the 
wages  fund  proper  :  whether  the  tangible  commodities 
that  can  go  or  will  go  to  laborers  are  at  any  moment  lim- 
ited. By  proceeding  on  this  line  Cairnes  might  have  been 
able  to  give  a  direct  answer  one  way  or  the  other  to 
Thornton's  questions  as  to  determinateness.  But  he 
passes  at  once  to  the  other  problem, — as  to  "  the  limits 
arising  from  the  action  of  human  interests  operating  under 
the  actual  circumstances  of  man's  environment  in  the 
world."  These  "economic"  limits  are  simply  that  "prof- 
its are  already  at  or  within  a  handbreath  of  the  mini- 
mum "  :  here  is  the  effective  obstacle  to  the  endeavor  of 
trade-unions  to  raise  general  wages. 

When  he  got  to  this  point,  Cairnes  said  explicitly  that 
the  reasoning  applied  only  to  "the  average  rate  of  wages, 
as  a  permanent  state  of  things  "  (the  italics  are  his  own). 

*  Cairnes.  Book  II,  ch.  iii,  t;  r. 


262  WAGES   AND   CAPITAL. 

For  a  while,  trade-unions  may  secure  a  general  rise  in 
wages,  even  though  profits  be  at  the  minimum:  but  after 
a  lapse  of  time,  and  in  consequence  of  a  shrinkage  of 
capital,  they  will  find  they  have  killed  the  goose  that  laid 
the  golden  eggs.  Under  favorable  conditions,  when  the 
progress  of  industry  makes  a  gain  possible  in  one  direc- 
tion or  another,  they  may  secure  a  rise  in  wages  at  once, 
instead  of  waiting  until  a  rise  in  profits  brings  greater  ac- 
cumulation of  capital,  and  thus,  eventually,  higher  wages. 
Either  of  these  admissions  assumes  a  wages  fund  that  for 
the  moment  is  not  determinate.*  By  implication,  Thorn- 
ton's questions  are  answered  just  as  he  would  have  an- 
swered them;  and  the  wages  fund  is  rehabilitated  by  re- 
stating a  doctrine  as  to  the  relation  of  wages  and  profits, 
and  the  effects  of  profits  on  accumulation,  which  had  been 
preached  by  almost  every  English  writer  of  the  century. 

It  may,  indeed,  be  maintained  that  there  never  was 
more  than  this  to  the  wages  fund  doctrine:  namely,  Ri- 
cardo's  teaching  that  profits  were  the  leavings  of  wages, 
and  his  further  teaching  that  accumulation  was  increased 


*  "A  capitalist,  for  example,  who  has  committed  himself  to  an  indus- 
trial enterprise  by  making  large  purchases  of  building  and  plant  must 
find  labourers  to  work  for  him  or  suffer  heavy  loss.  .  .  .  Under  these  cir- 
cumstances, supposing  the  workmen  on  whom  he  relies  to  strike  for 
higher  wages,  and  that  he  has  reason  to  believe  they  possess  the  resolu- 
tion and  are  in  command  of  funds  sufficient  to  enable  them  to  maintain 
a  prolonged  strike,  it  may  be  wisdom  to  concede  to  their  demands.  .  .  . 
It  is  evident,  therefore,  that  workmen  have,  by  means  of  combination 
and  by  accumulating  sufficient  funds,  very  considerable  power  of  acting 
upon  the  rale  of  wages." — Cairnes,  Leading  Principles,  liook  II,  ch. 
iii,  §  3.  This  was  all  that  Thornton  maintained.  Compare  the  pas- 
sage cited  above,  at  p.  257,  about  the  employer  with  the  ^10,000,  which 
he  is  supposed  to  assign  in  certain  fixed  proportions  to  plant,  material, 
and  wages.  In  the  extract  just  given,  Cairnes  admits  that  the  sum  avail- 
able for  wages  may  be  stretched  without  affecting  the  other  parts  of  capi- 
tal ;  and,  a:-,  the  context  shows,  extends  the  admission  to  wages  at  large. 


LONGE— THORNTON— MILL— CAIRNES.  263 

by  high  profits  and  diminished  by  low.  Historically,  there 
may  be  ground  for  this  contention.  We  have  seen  that 
the  whole  doctrine  of  wages  as  determined  by  the  ratio  of 
capital  to  population  was  crystallized  by  Ricardo's  hand- 
ling of  capital  as  resolvable  into  a  succession  of  advances 
to  laborers.  We  have  seen,  too,  that  the  rigidity  or  deter- 
minateness  of  the  capital  from  which  wages  came  was  not 
often  prominent  in  the  minds  of  the  writers  who  main- 
tained its  importance.  But  none  the  less,  the  wages  fund 
doctrine  is  a  different  and  distinct  one  from  that  of  the 
determination  of  wages  by  product,  via  capital.  It  ap- 
plies to  wages  in  any  one  season  ;  and  presents  primarily 
the  question  whether  at  any  given  time  there  is  an  amount 
of  capital  available  for  paying  wages  which  can  or  can  not 
be  increased.  That  wages  in  the  long  run  are  determined 
by  product,  with  enough  deduction  for  interest  to  induce 
the  accumulation  of  capital,  is  stoutly  maintained  by  plenty 
of  writers  who  sweep  the  wages  fund  out  of  the  way  with 
scorn.  It  is  virtually  Cairnes's  doctrine ;  and,  while  he 
insists  on  an  advance  from  capital  as  an  intermediate 
step  in  the  settlement  of  wages  by  product,  he  adds  noth- 
ing to  what  his  predecessors  had  said  as  to  the  manner 
and  degree  of  the  determination  of  the  advance  of  capi- 
tal, or  as  to  the  position  of  employers  and  hired  labor- 
ers in  the  social  use  of  capital  and  in  the  social  distribu- 
tion of  finished  goods. 

Before  leaving  this  last  stage  in  the  old-fashioned  way 
of  reasoning  on  the  subject,  it  may  be  pointed  out  how, 
notwithstanding  his  professed  maintenance  of  the  older 
doctrines,  Cairnes  had  diverged  far  from  them  in  his  final 
conclusions.  He  marks  the  last  stage  in  a  change  of  em- 
phasis, so  great  as  to  be  a  change  of  opinion,  which  had 
been  going  on  gradually  and  almost  imperceptibly  among 
the  English  writers  since  Ricardo's  day.  Ricardo  had  laid 
it  down  first,  that  market  wages  depend  on  the  ratio  be- 


264  WAGES  AND  CAPITAL. 

tween  capital  and  population ;  second,  that  if  the  result 
of  the  momentary  ratio  were  wages  higher  or  lower  than 
was  "  necessary  "  or  "  natural/'  population  would  increase 
or  decrease  until  wages  were  again  at  the  normal  point ; 
third,  that  if  the  result  of  this  process  again  were  high 
profits,  accumulation  of  capital  would  be  stimulated,  until 
at  last  a  stage  of  equilibrium  might  be  reached.  In 
Cairnes,  we  find  that  the  second  and  third  propositions 
have  changed  places.  The  first  step  in  the  analysis  re- 
mains practically  the  same,  though  the  phrases  are  changed 
a  bit :  wages  depend  on  the  ratio  between  the  number  of 
laborers  and  that  part  of  capital  which  constitutes  wages 
fund.  The  second  step  now  is  that  if  the  process  results 
in  higher  or  lower  profits  than  are  needful  to  induce  ac- 
cumulation, capital  will  grow  more  or  less  rapidly,  and 
its  return  will  be  brought  back  to  the  normal  level.  Capi- 
tal gets  a  certain  minimum  return  :  wages  get  the  rest. 
The  third  step  is  that  which  Ricardo  had  put  second  :  the 
Malthusian  theory  of  population,  regulating  the  supply 
of  labor,  and  eventually  bringing  wages  to  the  point  fixed 
by  the  standard  of  living.  The  two  writers,  at  either  end 
of  the  line,  agree  in  giving  scant  attention  to  the  step 
which  they  put  third  in  order.  Ricardo  said  little  of  the 
accumulation  of  capital  and  the  likelihood  of  its  respond- 
ing to  a  high  or  low  rate  of  profits  :  he  conceived  that 
wages  adjusted  themselves  to  their  natural  rate  more 
quickly  than  profits  to  their  point  of  equilibrium.*  Cairnes, 


*  Ricardo  generally  dismissed  the  question  as  to  profits  in  a  footnote, 
as  in  the  Essay  on  the  Influence  of  a  High  Price  of  Corn,  Works,  p. 
377  ;  or  briefly  referred  in  his  text  to  the  fact  that  of  course  accumulation 
would  be  checked  long  before  profits  got  to  zero.  Works,  p.  67.  The 
chapter  in  the  Political  Economy  entitled  "  The  Effects  of  Accumulation 
on  Profits  "  (chapter  xxi)  is  chiefly  given  toother  subjects  than  its  title 
indicates  :  to  some  criticisms  of  Adam  Smith,  and  to  the  relation  between 
gross  profits  and  interest. 


LONGE— THORNTON— MILL— CAIRNES.  265 

on  the  other  hand,  makes  but  brief  and  off-hand  mention 
of  the  supply  of  labor  as  determined  by  the  principle  of 
population  ;  while  the  increase  or  decrease  of  capital,  in 
correspondence  with  the  rise  or  fall  of  profits  above  the 
normal  point,  is  presented  and  emphasized  at  length.  In 
Ricardo,  profits  appear  as  the  residuary  legatee ;  in 
Cairnes,  wages. 

This  change  in  emphasis  appeared  gradually.  Torrens 
and  M'Culloch  had'  approached  the  later  point  of  view 
when  they  confronted  laborers'  combinations  with  the 
same  objection  as  Cairnes's :  an  enforced  rise  in  wages 
would  check  accumulation.  Mill  stood  half-way,  on  this 
subject  as  on  others.  He  gave  much  space  to  the  effec- 
tive desire  of  accumulation,  and  the  rate  of  return  on  capi- 
tal as  a  measure  of  that  desire;  and  he  presented  the 
tendency  of  profits  to  a  minimum  in  a  manner  to  imply 
that  accumulation  responded  rapidly  and  easily  to  changes 
in  the  rate.  Elsewhere,  and  more  commonly,  he  remains 
on  the  Ricardian  ground:  wages  are  the  element  that  is 
stationary,  and  profits  vary.  In  Cairnes,  the  assumed 
fixity  of  wages  at  last  becomes  only  a  remoter  possibility, 
not  dwelt  on  at  all  in  the  treatment  of  concrete  questions. 
This  final  abandonment  of  a  doctrine  fundamental  in  Ri- 
cardo's  reasoning  on  distribution  brought  with  it  a  com- 
plete change  of  front,  and  new  vistas  on  every  aspect  of 
the  social  questions :  a  change  of  which  all  the  conse- 
quences in  economic  theory  have  not  yet  been  fully 
worked  out. 


CHAPTER   XIII. 

THE    WAGES    FUND    IN    GERMANY. 

WE  may  now  conveniently  consider  the  treatment  of 
the  wages  fund  doctrine  by  the  economists  of  Continental 
Europe  ;  and  among  these,  chiefly  by  the  Germans.  Chron- 
ologically, this  phase  of  the  history  of  the  doctrine  should 
have  an  earlier  place  ;  for  an  unmistakable  departure  from 
the  lines  of  reasoning  traditional  among  the  English  was 
made  by  Hermann  before  the  days  of  the  younger  Mill. 
But  the  insular  condition  of  social  and  political  specula- 
tion in  Great  Britain  in  the  middle  of  the  century,  and  the 
stagnation  of  economic  thought  in  particular,  prevented 
any  breath  of  influence  from  reaching  English  thinkers. 
The  Germans  went  their  way,  unnoticed  by  their  English- 
speaking  contemporaries,  until,  in  very  recent  times,  links 
of  connection  were  formed,  and  the  international  exchange 
of  thought  has  rebegun. 

Outside  of  Germany,  there  is,  before  our  own  days, 
practically  nothing  on  the  subject.  The  French  never 
were  much  influenced  by  Ricardo ;  and  consequently  that 
simplification  of  the  theory  at  Ricardo's  hands,  by  which 
wages  were  assumed  to  be  paid  once  for  all  from  a  specific 
quantum  of  capital,  never  appeared  among  them  in  em- 
phatic form,  and  never  received  great  attention.  They 
commonly  said  that  wages  depended  on  capital ;  but  with 
less  emphasis  and  less  definiteness  of  statement  than 
among  English  writers.  To  go  through  the  hasty  and 

260 


THE   WAGES    FUND    IN    GERMANY.- 


267 


uncertain  versions  of  the  relation  of  capital  to  wages, 
which  are  to  be  found  from  Say  to  Bastiat  and  Cherbuliez, 
would  be  to  repeat,  with  even  less  satisfactory  results,  the 
story  of  inconsequent  thinking  which  we  have  found  in 
the  English  successors  of  Ricardo.  Among  Italians,  also, 
nothing  of  interest  or  importance  appears ;  and  we  may 
turn  at  once  to  the  Germans. 

Hermann  has  already  been  referred  to  as  the  writer 
who  began  the  breach  with  the  English  theorists.  Before 
his  time  it  is  difficult  to  find  much  that  is  promising  in 
German  economic  thought,  beyond  the  work  of  populariz- 
ing and  spreading  the  views  of  Adam  Smith.  Hermann 
was  an  incisive  and  original  thinker;  and  his  reasoning 
on  wages  and  capital  is  as  unquestionably  the  source  of 
the  treatment  of  this  subject  in  German  text-books,  as 
Ricardo's  on  international  trade  is  of  the  handling  of  that 
subject  among  the  English.  He  was,  moreover,  one  of 
the  few  Continental  writers  who,  before  the  present  move- 
ment in  economics  began,  had  read  Ricardo  with  care, 
and  had  been  affected  by  his-  example  of  rigid  analysis 
and  unrelenting  reasoning;  and  he  approached  the  sub- 
ject, unlike  Jones  and  Sismondi,  in  a  mood  to  develop 
rather  than  to  question  the  classic  doctrines.  The  first 
edition  of  his  Staatswirthschaftliche  U>itersuchungen\\^p\^>- 
lished  in  1832.  The  second  and  enlarged  edition  of  1874 
served  rather  to  amplify  his  reasoning  than  to  add  any- 
thing substantially  new.  The  high  intellectual  quality  of 
the  book  and  the  independence  of  its  thought  are  beyond 
question  :  and  the  German  economists  are  certainly  not 
without  justification  in  their  admiration  of  Hermann's 
work  and  in  their  willingness  to  accept  his  doctrines. 

As  to  wages,  Hermann  objects  to  the  doctrine  then 
current  in  England  on  several  grounds.  First,  the  num- 
ber of  laborers  paid  directly  out  of  the  income  of  consu- 
mers is  too  large  to  be  overlooked;  and  Hermann  notes 


268  WAGES   AND   CAPITAL. 

with  approval  that  Adam  Smith  had  made  "  revenue  "  as 
well  as  "  stock  "  a  source  from  which  wages  are  paid. 
Next,  the  proportion  of  wages  fund  to  other  capital  is  not 
defined  in  the  current  statements.  This  objection  had 
been  sporadically  presented  in  England  before  Hermann 
made  it;  but  neither  there  nor  in  Hermann's  reasoning  is 
it  given  the  prominent  place  which  it  received  in  later 
times.  The  radical  objection  is  the  last  one.  Capital, 
after  all,  is  not  the  real  source  from  which  wages  are  paid. 
That  real  source  is  the  income  of  those  who  buy  the  prod- 
ucts made  by  the  laborers,  or,  briefly,  the  income  of  con- 
sumers. Here  is  the  objection  accepted  as  conclusive  by 
Hermann's  followers  in  Germany,  and  serving  as  the  basis 
of  their  own  statements  of  the  causes  determining  wages.* 
To  understand  the  views  of  any  writer  on  the  whole 
range  of  subjects  of  which  the  wages  fund  doctrine  is  a 
part,  it  is  needful  to  consider  his  views  on  the  nature  and 
functions  of  capital  at  large,  and  more  particularly  on  the 
place  in  the  analysis  of  capital  of  finished  commodities 
consumed  by  laborers.  Unfortunately,  on  this  vital  topic 
we  find  Hermann  speaking  with  uncertain  sound.  Not 
that  he  had  failed  to  give  careful  thought  to  the  analysis 
of  capital.  To  the  word  "  capital  "  he  gave  that  larger 
significance  which  has  already  been  referred  to.f  Virtu- 
ally all  wealth  he  regards  as  capital:  classifying  it  as  con- 


*  Staatsiuirthschaftliche  Untcrsuchungcn,  first  edition,  pp.  280-285  ; 
second  edition,  pp.  474-477.  It  is  significant  of  the  change  in  social  con- 
ditions in  the  interval  between  the  two  editions  (1832-1874)  that  in  the 
first  Hermann  says  the  wages  fund  doctrine  is  practically  harmful,  be- 
cause it  encourages  arrogance  among  the  employers,  who  are  taught  to 
think  themselves  the  real  payers  of  wages,  and  so  entitled  to  favors  and 
bounties  ;  while  in  the  second  he  finds  it  harmful  because  it  teaches  la- 
borers to  look  on  employers  as  the  real  wages-givers,  and  so  lures  igno- 
rant workmen  into  hopeless  strikes. 

f  See  above,  Part  I,  Ch.  II,  p.  39. 


THE   WAGES    FUND    IN    GERMANY.  269 

sumer's  and  producer's  capital,  according  as  it  is  or  is  not 
yet  in  the  hands  of  those  who  are  to  derive  enjoyment  for 
it.  This  suggestive  distinction  has  been  permanently  in- 
corporated into  most  German  text-books ;  while  his  de- 
scription of  the  mode  in  which  circulating  capital  (a  part 
of  producer's  capital)  constantly  passes  into  commodities 
for  immediate  use,  and  so  into  consumer's  capital,  antici- 
pates much  modern  thought  as  to  the  steady  ripening  of 
inchoate  wealth  into  enjoyable  commodities.  Clearly  Her- 
mann meant  by  consumer's  capital  what  has  been  described 
in  these  pages  as  enjoyable  wealth;  while  producer's  capi- 
tal signifies  what  has  here  been  described  as  simply  capi- 
tal. For  a  consideration  of  the  fundamental  relation  of 
capital  to  wages,  it  would  be  necessary  for  Hermann  to 
set  forth  clearly  what  place  he  would  assign  to  the  en- 
joyable commodities  constituting  the  real  reward  of  la- 
borers: whether  they  are  to  be  regarded  as  producer's 
capital  or  as  consumer's  capital. 

But  on  this  topic  he  did  not  fully  work  out  his  conclu- 
sions. In  agricultural  operations  he  classes  food  for 
laborers  as  part  of  circulating  capital,  i.  e.,  as  producer's 
capital.*  Elsewhere  he  clearly  implies  that  all  consu- 
mable commodities  of  a  perishable  sort,  whether  used  by 
laborers,  by  capitalists,  or  by  idlers,  are  not  part  of  pro- 
ducer's capital  at  all.f  In  discussing  wages,  he  speaks 
of  the  employers'  capital  as  a  fund  which  could  act  but 
once  in  paying  wages,  and  which  would  be  dissipated  un- 
less constantly  replaced  from  the  sale  of  the  product, — a 
statement  which  implies  that  this  capital  is  at  least  the 
immediate  source  from  which  the  laborer's  wages  are  first 
derived.  Here  are  doctrines  not  clearly  formulated  and 


*  Staalswirthschaftliche  Untersiichnngen,  p.  307,  2nd  edition, 
f  See  the  analysis  of  Nutzkapital  at  p.  221,  and  of  fltissiges  Kapital 
at  p.  283. 


270 


WAGES   AND   CAPITAL. 


not  entirely  consistent  with  each  other  ;  defects  which 
illustrate  once  again  the  difficulties  which  beset  the 
thinker  in  this  tangled  subject. 

We  are  compelled,  therefore,  for  our  guidance  in  fol- 
lowing Hermann's  views,  to  rely  on  the  comparatively  brief 
passages  in  which  he  advances  directly  the  doctrine  that 
consumer's  income  is  the  real  source  of  wages.  This,  as 
we  have  seen,  was  virtually  the  doctrine  put  forth  by 
Longe,  at  a  much  later  date,  though  with  much  less  con- 
sistency of  statement.  Something  has  already  been  said  in 
explanation  and  criticism  of  it;  but  in  view  of  the  promi- 
nent place  it  has  had  in  the  theoretic  literature  of  Ger- 
many, something  more  may  be  added. 

The  difficulty  with  a  view  like  Hermann's  is  that  it  does 
not  clearly  distinguish  between  particular  wages  and 
general  wages, — between  the  causes  which  affect  the 
wages  of  one  class  of  laborers  as  compared  with  another, 
and  the  causes  which  determine  the  wages  of  all  laborers. 
The  nature  and  extent  of  the  consumer's  demand  for  the 
products  made  by  a  particular  set  of  laborers  have  an 
obvious  effect  on  the  wages  of  these  laborers;  and  the 
inference  is  easy,  however  unwarrantable  on  closer 
thought,  that  all  wages  depend  on  consumer's  demand  or 
income.  The  transition  is  made  the  more  natural  by  the 
habit  of  considering  capital  in  terms  of  money,  and  the 
capitalist  employer  as  the  possessor  of  a  fund  of  cash 
which  represents  the  apparatus  of  production  controlled 
by  him.  Even  before  the  time  of  the  younger  Mill,  the 
English  economists,  whom  Hermann  followed  and  criti- 
cised, frequently  spoke  of  it  as  a  money  fund.  Ricardo 
had  set  the  example  of  reducing  all  capital  to  terms  of 
money  ;  his  immediate  successors  did  more,  and  spoke  of 
wages  capital  as  if  it  consisted  of  cash  and  nothing  more. 
Hermann  saw  that  the  wages  fund,  in  this  sense,  so  far  as 
it  existed  at  all.  was  constantly  replenished  from  the  sale 


THE   WAGES   FUND    IN   GERMANY.  271 

of  the  disposable  product ;  and  he  was  naturally  led  to 
regard  those  who  bought  the  product  as  the  real  payers 
of  wages.  And,  to  repeat,  the  wages  of  any  particular 
set  of  laborers  do  depend  precisely  on  this.  Their  money 
income  and  their  share  of  the  goods  available  for  con- 
sumption are  settled  by  the  terms  on  which  their  products 
sell  in  the  market.  The  appearance  of  the  capitalist  em- 
ployer as  a  middleman  between  them  and  the  purchaser 
does  not  alter  this  situation,  so  long  as  the  competition 
between  capitalists  is  free.  What  the  employer  can  pay 
the  individual  laborer,  or  the  group  of  individual  laborers, 
and  what  he  will  pay  if  competition  is  free,  depends  on 
what  the  consumers  pay  him. 

Bearing  in  mind  that  the  wages  fund  doctrine  is  worth 
discussing,  or  replacing  by  something  else,  only  as  an 
attempt  to  discover  the  causes  determining  general  wages, 
we  find  very  great  and  very  obvious  difficulties  in  the  way 
of  applying  Hermann's  reasoning  to  the  wider  question. 
At  bottom,  he  presents  the  old  question  whether  demand 
for  commodities  is  demand  for  labor;  and  on  that  question 
the  reasoning  of  the  classic  writers  was  in  essentials  so 
simple  and  so  sound  that  there  is  no  escape  from  answer- 
ing, as  they  did,  in  the  negative.  We  may  intelligently 
measure  the  remuneration  of  an  individual  section  or  class 
of  society  in  terms  of  money,  and  so  may  seek  the  measure 
of  particular  wages  in  the  Zahlungsfdhigkeit,  or  money  de- 
mand, of  those  who  buy  the  laborers'  product.  But  for  so- 
ciety as  a  whole,  and  for  laborers  as  a  whole,  consumable 
commodities  are  the  only  measure  of  income, — money 
and  exchange  being  but  devices  for  sharing  this  real  in- 
come among  the  different  members.  The  ultimate  source 
can  only  be  the  output  of  real  goods  from  the  labor 
of  society, — the  steady  flow  of  enjoyable  things  which 
issues  from  the  exertions  of  men.  This  is  the  total  con- 
sumer's income, — the  source  from  which  all  of  us,  whether 
19 


272 


WAGES    AND   CAPITAL. 


laborers  or  idlers,  get  remuneration  or  tribute  or  alms.  It 
is  clear  that  Hermann  did  not  mean  to  lay  down  the  prop- 
osition that  wages  come  from  consumer's  income  in  this 
sense.  He  had  in  mind  the  money  payments  of  those 
who  buy  goods  from  the  employer,  and  so  recoup  him  for 
his  outlays.  But  these  purchases  are  of  importance  only 
in  determining  the  share  of  real  wages  or  real  consumer's 
income  got  by  a  particular  group  of  laborers  :  they  play 
no  part  in  the  causes  determining  wages  at  large. 

The  same  fundamental  difficulty  emerges  from  another 
point  of  view.  Laborers  are  themselves  consumers,  in 
many  countries  the  largest  and  most  important  body  of 
consumers.  They  buy  commodities  with  their  wages;  and 
their  demand,  according  to  Hermann's  reasoning,  is  an 
ultimate  source  of  wages.  Wages  are  thus  an  important 
source  of  wages, — reasoning  which  runs  so  obviously  in  a 
circle  that  we  must  be  surprised  to  find  it  unnoticed  by  a 
mind  as  acute  as  Hermann's.  If  it  be  objected  that  there 
are  consumers,  like  rent  receivers  or  pensioners,  who  are 
not  laborers,  the  situation  is  not  bettered.  Unless  we 
suppose  the  laborers  to  produce  only  commodities  bought 
by  these  separate  consumers,  and  to  buy  among  them- 
selves no  commodities  made  by  other  laborers,  we  still 
find  that  consumer's  income  includes  in  its  constituent 
parts  a  larger  or  smaller  element  of  wages,  and  that  an 
undefined  portion  of  the  source  of  wages  is  simply  wages. 

Hermann's  doctrine,  ineffective  as  it  is  in  grappling 
with  the  question  of  general  wages,  nevertheless  has  found 
its  way  into  almost  every  German  book  on  general  eco- 
nomics. On  the  one  hand,  the  confusion  between  money 
and  real  wages;  on  the  other,  the  natural  disposition  to 
fasten  attention  to  the  dealings  between  the  immediate 
employers  and  their  hired  laborers, — make  its  acceptance 
easy  of  explanation.  Moreover,  in  Germany  economic 
discussion  has  always  been,  much  to  its  advantage,  more 


THE    WAGES   FUND   IN   GERMANY. 


273 


concrete  than  that  of  Ricardo's  followers  in  England  ;  and 
the  liberal  space  given  to  an  enumeration  of  specific 
causes  affecting  the  wages  of  different  sets  of  laborers, 
indicates  an  attitude  toward  the  whole  subject  such  as 
would  make  natural  the  ready  acceptance  of  an  appar- 
ently straightforward  and  practical  explanation  of  wages 
as  determined  by  consumer's  demand.  At  all  events, 
hardly  a  book  on  economics  from  a  German  hand  since 
the  time  of  Hermann  can  be  found  in  which  his  lead  on 
the  subject  of  wages  is  not  more  or  less  closely  followed. 
While  Hermann  himself,  so  far  as  spirit  and  method 
are  concerned,  did  not  diverge  far  from  the  classic  school, 
his  views  on  wages  seem  to  have  gained  acceptance  in 
proportion  as  the  breach  with  the  English  writers  became 
wider.  In  Rau's  treatise,  which  expounded  economic 
principles  to  two  generations  of  German  students  on  the 
familiar  English  lines,  we  still  find  the  old  doctrine  that 
wages  depend  on  the  quantity  of  capital.  In  later  edi- 
tions Ran  referred  to  Hermann's  doctrine  in  his  notes, 
and  there  admitted,  with  caution,  that  the  latter  had  right- 
ly divined  the  ultimate  source  of  wages;  but  the  classic 
theory  maintains  its  place  in  the  text  in  the  dignity  of 
large  type.*  In  Mangoldt's  Volksivirthschaftslehre,  which, 
though  not  published  until  1868,  represents  the  methods 
and  traditions  of  an  earlier  date,  the  subject  is  discreetly 
given  a  wide  berth.  Apparently,  Mangoldt  was  not  dis- 
posed to  commit  himself  either  to  the  old  doctrine  or  to 
Hermann's  modification. \  But  in  a  book  like  Roesler's 
on  Wages,  which,  though  it  made  no  deep  impression  on 
German  thought,  reflected  the  drift  of  things  at  the  time 


*  Rau's  Lehrbnch,  eighth  edition  (iSGS),  £  195. 

f  It  is  due  to  this  subtle  and  independent  thinker  to  say  that  his 
Volksiuirthschaftslehre  was  printed  posthumously,  from  a  manuscript  not 
left  in  finished  state. 


2/4 


WAGES   AND   CAPITAL. 


of  its  publication  (1861),  Hermann's  views  appear  with 
marked  emphasis.  We  are  told,  in  italics,  that  the  em- 
ployer's capital  is  indifferent  to  the  laborers,  who  draw 
their  wages  solely  from  the  consumers,  the  employer  being 
merely  a  middleman.*  Reseller's  Political  Economy,  in 
which  the  independent  German  movement  first  took  shape 
in  a  general  text-book,  also  accepts  Hermann's  view. 
Roscher's  statement  is  sententious,  in  accordance  with 
his  general  practice;  but  it  is  none  the  less  clearly  an 
adoption  of  Hermann's  view.f  The  year  of  his  first  edi- 
tion (1854)  may  be  noted  as  a  date  after  which  Hermann's 
doctrine  appears  in  almost  every  German  book  on  gen- 
eral economics. 

The  next  important  and  independent  step,  with  effects 
clearly  traceable  in  the  theoretic  parts  of  current  German 
treatises,  was  taken  by  a  writer  still  active  among  us, 
Professor  Lujo  Brentano.  Shortly  after  the  publication 
of  Thornton's  book  On  Labour,  and  of  Mill's  review  of 
Thornton  in  the  Fortnightly,  Professor  Brentano  printed 
in  the  Jahrbucher  fiir  Nationaloekonomie  a  paper  on  the 
theory  of  wages  as  developed  by  English  economists.^; 
Some  further  discussion  of  the  subject  was  undertaken  by 
him  in  the  second  part  of  his  book  on  the  English  trade 
unions  (Zur  Kritik  der  englischen  Gewerkvereine,  1872)  ;  and 
it  is  again  considered  briefly  in  the  volume  on  Die  Arbei- 
terverhaltnisse  gemass  item  heittigen  Recht  (1877).  The  later 
publications  add  little  to  the  theoretic  matter  of  the  paper. 


*  C.  F.  II.  Roeslcr,  Zur  Kritik  der  LcJire  vein  Arbcitslohn  (1861),  p. 
141  ;  compare  also  p.  87.  Roesler  follows  Hermann  closely  on  other 
doctrines,  especially  in  regard  to  the  separate  productivity  of  capital 

f  Roscher's  Nationaloekonomie,  §§  165,  166.  The  rendering  of  these 
passages  in  the  English  translation  of  Roscher  is  far  from  satisfactory. 

\  Die  Lehre  von  den  Lohnsteigerungen  mit  besonderer  Riicksicht  aitf 
die  englischen  Wirthschaftslehrer.  Jahrbiicher  fiir  Nationaloekonomie, 
I  Folge,  vol.  xvi,  pp.  251-281  (1871). 


THE   WAGES    FUND    IN    GERMANY. 


275 


in  the  Jahrbiicher,  which  deserves  careful  attention,  as  be- 
ing, after  Hermann,  the  most  influential  of  German  con- 
tributions to  the  theory  of  wages. 

Professor  Brentano's  paper  divides  itself  into  three 
parts.  First  comes  a  sketch,  admirably  done,  of  the  his- 
tory of  the  wages  fund  doctrine  among  English  writers  ; 
then  a  consideration  of  that  doctrine;  and,  finally,  an 
effective  criticism  of  Thornton's  theory  of  wages.  It  is 
the  second  part,  on  the  wages  fund  doctrine,  which  chiefly 
concerns  us  here.  With  it  goes  a  discussion  of  the  the- 
orem that  demand  for  commodities  is  not  demand  for 
labor.  That  theorem  had  been  used  by  the  classic  writ- 
ers, and  especially  by  Mill,  chiefly  as  an  answer  to  the 
notion  that  the  luxurious  expenditure  of  the  rich  was  bene- 
ficial to  the  poor;  but  Professor  Brentano  rightly  treats 
it  as  a  simple  corollary  of  the  doctrine  that  wages  are  paid 
from  capital,  and  as  significant  in  its  relations  to  that 
doctrine. 

Like  Thornton,  Professor  Brentano  is  on  one  point 
more  conservative  than  some  later  critics  of  the  old  doc- 
trine. Wages  he  admits  to  be  paid  in  the  first  instance 
from  capital.  "There  must  be  a  stock  of  accumulated 
products  of  previous  labor — that  is,  of  capital — sufficient 
to  feed  the  laborers  engaged  in  production."  But,  like 
the  English  writers  of  earlier  and  later  date,  Brentano 
does  not  linger  over  the  why  and  how  of  this  need  of  an 
"  accumulation"  of  real  commodities.  The  point  of  view 
is  soon  shifted  to  that  of  the  advance  of  capital  by  employ- 
ers to  hired  laborers,  without  notice  of  the  difference  be- 
tween this  and  the  advance  from  an  accumulated  stock  of 
products.  In  the  book  on  English  trade  unions,  the  im- 
portance of  capital  as  the  proximate  source  of  wages  is 
again  admitted;  but  it  is  urged  that  it  is  only  a  vehicle 
which  serves  to  convey  wages  to  the  laborers  from  their 
real  source.  It  is  on  the  fixity  of  the  fund,  and  the  ulli- 


2/6 


WAGES   AND   CAPITAL. 


mate  source  whence  it  is  replenished,  that  he  professes  to 
differ  with  Mill  and  Mill's  teachers.  He  points  out  with 
truth  that  the  predetermination  or  fixity  of  the  wages  fund 
was  never  laid  down  emphatically  by  Mill  in  the  Political 
Economy  ;  and,  at  all  events,  he  reaches  unreservedly  his 
own  conclusion  that  there  is  no  such  fixity.  The  capital 
which  employers  will  turn  over  to  laborers  is  an  elastic 
quantity.  It  can  be  swelled  by  the  use  of  credit,  or  by 
trenching  on  the  funds  which  the  employer  had  meant  to 
use  for  his  own  consumption  ;  and  it  accommodates  itself 
readily  to  changes  in  the  ultimate  source  of  wages.  As  to 
that  ultimate  source,  Brentano  expressly  accepts  Hermann's 
views:  the  source  lies  in  the  income  of  those  who  buy  the 
laborer's  product. 

The  essential  thing  to  note  in  Brentano's  ingenious 
and  able  discussion  is,  that  the  capital  which  is  described 
as  the  proximate  source  of  wages  is  still  conceived  as 
wholly  in  the  hands  and  at  the  disposal  of  the  immediate 
employer  of  labor.  It  is  still  a  "  fund,"  though  one  which 
can  be  swelled  in  one  way  or  another.  The  best  illustra- 
tion of  this  limitation  of  his  analysis  is  to  be  found  in  the 
treatment  of  the  mode  in  which  the  capital  at  the  disposal 
of  employers  can  be  enlarged. 

As  was  noted  a  few  moments  ago,  he  examines  Mill's 
statement  of  the  proposition  that  demand  for  commodities 
is  not  demand  for  labor.  Mill  had  asked  how,  even  with 
a  high  demand  for  velvets,  they  could  be  produced,  or  a 
demand  for  labor  could  set  in,  unless  there  were  food,  the 
product  of  former  labor  and  therefore  capital,  wherewith 
to  support  the  laborers  who  make  the  velvet.  Brentano's 
answer  to  Mill  is  a  simple  tu  quoque.  In  an  advanced  com- 
munity there  can  never  be  any  difficulty  in  securing  or 
augmenting  capital ;  for,  according  to  Mill's  own  doctrine, 
the  distinction  between  capital  and  non-capital  lies  only 
in  the  mind  of  the  owner.  An  increased  demand  for  vel- 


THE    WAGES   FUND   IN    GERMANY. 


277 


vets  would  cause  some  owners  to  change  their  minds,  and 
so  transform  part  of  their  possessions  into  capital  ;  thus 
an  effective  demand  for  labor  would  appear.  .This  turns 
the  tables  on  Mill  very  neatly  ;  for  Mill  had  expounded 
his  doctrine  as  to  the  determination  of  capital  by  the  mere 
intent  of  the  owner,  in  language  which  perhaps  fairly 
warranted  Brentano's  use  of  it.  But  that  doctrine  itself 
is  tenable  only  in  the  limited  sense  which  has  already  been 
indicated.*  In  the  long  run,  unquestionably  it  is  true  that, 
under  a  regime  of  private  property,  the  disposition  of  the 
owner  decides  whether  wealth  shall  be  used  for  imme- 
diate enjoyment,  or  for  producing  further  wealth,  that  is, 
as  capital.  At  any  given  moment,  however,  tools,  imple- 
ments, and  materials  are  of  necessity  capital ;  while  finished 
commodities  and  food  exist  in  a  quantity  which,  whether 
rigidly  fixed  or  not,  certainly  cannot  be  augmented  ad 
libitum  by  a  mere  change  of  intention. 

Brentano  had  in  mind  more  or  less  clearly  the  case  of 
the  individual  capitalist,  who  can  sell  his  house  or  his 
diamonds  or  his  factory,  and  can  use  the  money-proceeds 
in  hiring  laborers;  so  transforming,  by  a  mere  change  of 
intention,  his  luxuries  or  fixed  capital  into  wages-capital. 
Mill  perhaps  had  a  similar  possibility  in  mind ;  at  all 
events,  his  language,  not  only  in  the  passages  referred  to 
by  Brentano  but  in  plenty  of  others,  looked  to  the  funds 
and  means  of  the  direct  employers  of  labor.  As  to  the 
funds  of  an  individual  capitalist  and  employer,  it  is 
mockery,  as  Thornton  said,  to  ask  whether  they  are  fixed 
or  predetermined.  Brentano  could  have  no  difficulty  in 
disproving  the  fixity  of  the  wages  fund  from  this  point 
of  view.  But  such  an  inquiry  can  tell  us  nothing  as  to 
the  constitution  and  limits  of  the  total  money  funds 
which  the  whole  class  of  active  capitalists  have  at  their 

*  See  Chapter  III,  pp.  62,  67,  and  Chapter  XI,  pp.  225-227. 


278 


WAGES   AND   CAPITAL. 


disposal  for  the  hire  of  laborers;  still  less  can  it  tell  us 
anything  as  to  quantity  or  the  predetermination  of  the 
consumable  commodities  from  which  laborers  get  their 
substantial  reward. 

We  have  but  another  phase  of  the  same  difficulty  when 
Brentano  refers,  as  others  had  done  before  him,  to  the 
possible  use  of  credit  as  a  means  of  swelling  the  sources 
from  which  wages  are  paid.  He  remarks  that  the  capital- 
ist will  always  be  willing  to  grant  larger  wages,  provided 
he  can  get  them  back  through  higher  prices  paid  him  by 
the  consumer  ;  and,  if  it  happens  that  he  does  not  himself 
possess  the  funds  for  the  larger  payment,  he  simply  bor- 
rows them.  Of  the  individual  employer  this  is  unques- 
tionably true ;  and  of  the  process  by  which  a  particular 
set  of  laborers  may  get  better  terms  for  themselves  it  is 
an  accurate  account.  But  it  is  hardly  necessary  to  point 
out,  after  what  has  already  been  said,  that  a  stretching  of 
credit  can  not  possibly  affect  the  supply  of  commodities 
from  which  real  wages  must  come,  nor  serve  to  increase 
wages  at  large.  This  mode  of  approaching  the  problem 
of  general  wages  is  as  hopeless  as  that  which  makes  the 
wages  fund  expansible  by  a  change  in  the  intentions  of 
employers.  When  Brentano,  in  his  book  on  trade  unions, 
gives  a  statement  of  the  wages  fund  doctrine,  preparatory 
to  a  refutation  of  it,  he  defines  the  fund  as  "  the  property 
\Vennogen\  of  a  country  which  can  by  possibility  be  used, 
either  directly  or  as  a  means  of  obtaining  credit,  for  the 
payment  of  wages."*  Here  the  word  Vcrmogcn  is  used 
with  the  same  connotation  of  money  available  for  paying 
wages  that  appears  in  the  traditional  use  of  the  word 
"funds"  by  English  writers.  The  refutation  of  the  doc- 
trine in  this  form  does  not  advance  matters  more  than 
the  advocacy  of  it  did. 

*  Zur  Kritik  dcr  Englischen  Gewerkvereine,  pp.  200-203. 


THE   WAGES   FUND   IN   GERMANY. 


279 


If  the  negative  part  of  Brentano's  reasoning  is  thus 
unsatisfactory  as  to  the  real  difficulties  of  the  subject,  the 
positive  part  is  no  more  conclusive.  It  is  true  that  Her- 
mann's theorem  is  cited  in  terms,  and  is  accepted  :  con- 
sumer's demand  and  income,  we  are  told,  are  the  real  source 
of  wages.  But  Brentano  does  not  fail  to  see  the  difficulty 
arising  from  the  fact  that  laborers  themselves  are  con- 
sumers. A  rise  in  wages,  he  points  out,  may  be  secured 
partly  at  the  expense  of  other  wages,  and  so  may  be  nuga- 
tory for  laborers  as  a  class.  It  may  be  secured  also,  in 
part  or  in  whole,  from  the  incomes  of  other  classes, — from 
those  of  employers  or  investors  or  rent-receivers,  and  so 
may  represent  a  substantial  change  in  distribution  to  the 
advantage  of  the  receivers  of  wages.  All  this  is  true; 
and  followed  out  to  its  last  consequences,  would  bring 
the  writer  face  to  face  with  the  problem  of  the  elasticity 
of  the  total  money  funds  and  the  total  real  funds  which 
may  go  to  laborers  as  a  whole.  But  Brentano  does  not 
proceed  to  this  stage.  He  accepts  Hermann's  theory  as 
a  needed  correction  of  that  version  of  the  wages  fund  doc- 
trine which  had  been  brought  into  renewed  prominence  by 
the  attacks  of  Longe  and  Thornton ;  he  hints  at  the  deficien- 
cies of  Hermann's  solution,  so  far  as  general  wages  are 
concerned  ;  and  then  remarks  that  after  all  wages  at  large 
are  an  abstraction,  a  vague  and  indeterminate  generality, 
and  that  the  only  thing  worth  discussing  is  the  concrete 
rise  or  fall  in  the  wages  of  specific  sets  of  laborers.  This 
is  not  an  unnatural  conclusion,  in  view  of  the  unsatisfac- 
tory character  both  of  the  old  views  and  of  the  substitutes 
offered  by  writers  like  Thornton  and  Longe.  It  is  obvi- 
ously natural,  more  especially,  to  a  writer  who,  like  Bren- 
tano, had  given  detailed  study  to  the  history  and  doings 
of  trade  unions,  and  thus  had  been  brought  into  contact 
with  the  effective  causes  that  bear  on  the  fluctuations  of 
particular  wages  ;  causes  which,  as  has  been  pointed  out 


2 80  WAGES   AND   CAPITAL. 

elsewhere,*  have  little  to  do  with  the  general  flow  of  the 
real  wages  fund. 

The  final  conclusions  reached  by  Brentano  are  thus 
sensible  enough,  so  far  as  application  to  practical  ques- 
tions goes.  The  source  of  general  wages  is  elastic;  there 
is  no  iron-clad  obstacle  in  the  way  of  an  advance  in  wages 
for  any  particular  set  of  laborers;  such  an  advance  does 
not  necessarily  mean  a  corresponding  loss  to  other  labor- 
ers; a  general  simultaneous  advance  for  all  laborers  is 
not  indeed  theoretically  impossible,  but  is  not  worth  dis- 
cussing because  outside  the  practical  possibilities  of  real 
life.  All  this  is  true  ;  and  if  there  is  ambiguity  as  to 
the  cause  of  the  elasticity  of  wages, — whether  of  general 
or  particular  wages — it  does  not  affect  the  truth  of  the 
conclusions  as  to  the  limits  to  trades-union  action.  But 
the  theoretical  basis  of  the  whole  does  not  go  deep. 
There  is  no  complete  statement  of  the  function  of  capital 
in  the  production  or  distribution  of  wealth,  or  of  the  rela- 
tion between  the  operations  of  the  individual  employer 
and  the  source  of  real  wages. 

Hermann  and  Brentano  are  the  two  writers  who  have 
taken  the  lead  among  the  Germans  in  the  discussion  of 
wages;  and  the  result  of  their  combined  labors  has  been 
to  push  aside,  in  the  text-books  and  hand-books  of  the 
Germans,  the  simple  formula  of  the  older  English  writers, 
and  to  leave  nothing  very  distinct  in  its  place.  It  would 
carry  us  beyond  the  scope  of  the  present  inquiry  to  exam- 
ine the  variations  of  the  theory  of  wages  as  they  appear 
in  the  different  text-books  of  recent  years. f  In  most  of 
them  a  "  relative  "  truth  in  the  wages  fund  doctrine  is  ad- 

*  See  pp.  loi-ioS,  infra. 

f  For  a  brief  review  of  the  treatment  of  the  topic  in  some  of  the  well- 
known  German  books,  see  the  Quarterly  Journal  oj  Economics,  October, 
1894,  where  the  substance  of  the  present  chapter  was  published,  with 
some  further  details  and  examples. 


THE   WAGES   FUND    IN   GERMANY.  28l 

mitted,  or  at  all  events  something  is  said  as  to  the  impor- 
tance of  capital  for  the  immediate  payment  of  wages  ;  and 
then  there  is  some  further  reference,  more  or  less  explicit, 
to  Hermann's  proposition  as  to  consumer's  demand  as  the 
ultimate  source  or  determinant  of  wages.  On  this  topic, 
as  on  others,  the  theoretic  views  of  the  German  econo- 
mists of  the  last  generation  mark  a  transition  stage. 
The  clear-cut  doctrines  and  unqualified  statements  of  the 
Ricardian  school  in  England  were  found  inconclusive  and 
unsatisfactory.  But  nothing  very  precise  and  definite 
took  their  place.  The  old  sharply-defined  conclusions 
were  sometimes  rejected  without  attempt  to  put  anything 
in  their  place  ;  sometimes  the  edge  was  taken  from  them 
by  qualifications  and  corrections  which  made  it  difficult 
to  say  how  much  was  really  left.  This  tentative  mode 
of  expounding  the  subject  was  unquestionably  better  than 
the  bold  and  uncompromising  dicta  of  M'Culloch,  and  in 
many  ways  was  preferable  to  Mill's  exposition,  with  its 
emphatic  elaboration  of  the  Ricardian  deductions.  But  it 
could  not  lead  to  anything  definitive  ;  and  certainly  on 
the  wages  fund  it  served  rather  to  bring  out  the  deficien- 
cies of  the  English  writers  than  to  substitute  any  new 
doctrine  of  substantial  value. 


CHAPTER   XIV. 

CONTEMPORARY    DISCUSSION. 

IT  is  not  the  object  of  the  present  volume  to  follow  the 
discussion  of  the  wages  fund  doctrine  at  the  hands  of  the 
many  writers  of  our  own  time  who  have  expressed  their 
views  on  the  never  ending  controversy.  The  varieties  of 
opinion  are  endless  ;  on  no  topic  in  the  range  of  economic 
theory  would  it  be  so  difficult  to  extract  any  consensus  of 
opinion.  But,  to  understand  the  stage  at  which  the  dis- 
cussion stands,  it  will  be  advantageous  to  follow  two 
main  trains  of  thought  which  have  become  conspicuous 
and  important  during  the  last  twenty  years. 

After  the  weakness  of  the  old  doctrine  had  been  made 
plain  by  Thornton's  and  Longe's  criticisms,  Mill's  recan- 
tation, and  Cairnes's  attempt  at  rehabilitation,  the  attack 
was  continued  by  a  series  of  English-speaking  writers  of 
whom  President  Walker  was  the  acknowledged  leader. 
Not  only  was  it  continued  ;  but  it  was  carried  farther  than 
by  Longe  or  Thornton.  Not  the  rigidity  and  predeter- 
mination of  the  wages  fund,  but  the  significance  of  the 
payment  of  wages  from  capital  in  any  form  was  doubted 
or  denied.  The  initial  step  in  distribution  was  thus  de- 
clared to  be,  not  the  payment  of  wages  from  capital,  but 
the  division  of  shares  in  the  current  product  of  labor.  On 
the  other  hand,  a  new  mode  of  approaching  economic  the- 
ory was  advocated  in  an  entirely  different  quarter,  with- 
out immediate  reference  to  the  old  controversy,  yet  with 

282 


CONTEMPORARY   DISCUSSION.  283 

important  and  unmistakable  effects  on  it.  The  Austrian 
school  developed  a  new  theory  of  value,  and  from  that  a 
revised  statement  of  the  relation  of  capital  to  wages. 

The  most  significant  presentations  of  the  first-men- 
tioned train  of  thought,  in  which  the  payment  of  wages 
out  of  capital  is  absolutely  denied,  came  from  two  Ameri- 
can writers.  The  most  unqualified  was  that  of  Mr.  Henry 
George;  the  most  .influential  and  weighty  that  of  Presi- 
dent Francis  A.  Walker.  An  examination  of  their  argu- 
ments will  show  how  far  the  revolt  from  the  old  doctrines 
proceeded,  and  how  much  need  there  was  for  a  complete 
revision  of  this  part  of  economic  theory. 

George's  *  attack  on  the  old  views  was  the  later  of  the 
two  in  point  of  time;  but  it  was  the  more  extreme  and 
uncompromising;  and  its  consideration  will  most  advan- 
tageously open  this  stage  of  the  controversy.  Progress 
and  Poverty,  published  in  1879,1  nas  Ior  the  subject  of  its 
first  book  "  Wages  and  Capital,"  and  there  handles  the 
wages  fund  doctrine  without  gloves.  The  aim  of  the  book 
is  to  show  that  all  the  evils  of  the  social  body  arise  from 
private  ownership  in  land,  and  are  to  be  cured  by  the  vir- 
tual confiscation  of  land  on  the  part  of  the  state.  As  a 
preliminary  to  this  result,  it  was  necessary  to  dispose  of 
current  explanations  of  existing  difficulties,  and  among 

*  I  trust  I  shall  not  be  thought  discourteous  if  I  do  not  always  use 
the  conventional  prefixes  in  speaking  of  living  writers,  such  as  Mr. 
George,  President  Walker,  and  others  referred  to  in  this  chapter.  So  far 
as  Mr.  George  is  concerned,  I  am  glad  to  express  my  respect  for  his 
nobility  of  purpose  ;  while  the  stimulating  effect  of  his  writings  on  eco- 
nomic discussion  during  the  last  twenty  years  is  too  obvious  to  need  men- 
tion. 

f  The  preface  informs  the  reader  that  the  book  was  completed  in 
March,  1879,  but  that  the  views  maintained  in  it  were  set  forth  in  a  pam- 
phlet on  Our  Land  and  Land  Policy,  published  in  San  Francisco  in  1871. 
I  have  not  seen  the  earlier  pamphlet,  and  do  not  know  how  far  it  pre- 
sented the  wages  theory  of  Progress  and  Poverty. 


284  WAGES   AND   CAPITAL. 

them  the  explanation  of  low  wages  as  caused  by  relative 
scarcity  of  capital. 

The  arguments  against  the  wages  fund  doctrine  are 
twofold,  negative  and  positive.  They  are  meant  to  prove 
both  that  the  old  doctrine  is  false  in  itself,  and  that  another 
doctrine  is  sound. 

The  first  argument  to  show  that  the  wages  fund 
doctrine  is  false  is  its  incompatibility  with  an  unquestion- 
able fact, — 'the  co-existence  of  a  high  return  to  labor  and 
to  capital.  George  points  out  that  in  new  countries  both 
interest  and  wages  are  high.  High  wages,  according  to 
the  wages  fund  theory,  denote  a  plenty  of  capital.  High 
interest  denotes  a  scarcity  of  capital.  Therefore,  if  the 
theory  be  sound,  high  wages  and  high  interest  can  not  ex- 
ist together.  If  in  fact  they  do  exist  together, — and  every 
one  knows  that  sometimes  they  do, — the  theory  must  be 
false.  The  same  dilemma  is  presented  with  regard  to  the 
fluctuations  of  wages  and  interest  in  times  of  depression 
as  compared  with  times  of  activity.  When  there  is  indus- 
trial activity,  wages  and  interest  are  both  high  ;  yet  if 
plentiful  capital  be  the  cause  of  the  high  wages,  how  can 
interest  be  high  also  ?  The  converse  case  appears  in  times 
of  industrial  depression,  when  we  have  low  wages,  and 
yet  an  indication  of  a  plenty  of  capital  in  the  low  rate  of 
interest. 

This  would  be  promptly  answered  on  the  part  of  a 
writer  like  Cairnes  by  the  suggestion  that  "  capital  "  was 
used  in  different  senses  in  the  two  conjunctions.  Plenty 
of  capital  with  reference  to  wages  meant  plenty  of  "  cir- 
culating" capital,  in  the  phrase  of  the  older  writers;  or 
plenty  of  the  wages  fund  part  of  capital,  in  the  language 
of  Cairnes.  It  is  quite  possible  that  capital  itself  should 
be  relatively  not  plentiful,  and  yet  that  a  large  part  of  it 
should  be  "  circulating  capital,"  or  wages  fund.  Cairnes 
so  explained  those  conditions  in  new  countries  which 


CONTEMPORARY    DISCUSSION.  285 

George  presented  as  inconsistent  with  the  old-fashioned 
reasoning.  In  a  country  like  the  United  States  a  larger 
part  of  capital  is  in  the  form  of  wages  fund,  a  smaller  in 
the  form  of  plant  and  material.* 

This  is  a  fair  answer  to  a  question  like  George's,  even 
though,  as  an  independent  explanation  of  the  high  earn- 
ings of  laborers  in  new  countries,  it  does  not  cover  the 
whole  case.  George  at  all  events  meets  it  indirectly 
rather  than  directly.  This  reply  to  his  objections  can  not 
be  maintained,  he  avers,  as  to  the  second  part  of  his  argu- 
ment,— that  high  wages  and  high  interest  come  together 
in  "  good  times." 

It  is  not  improbable  that  the  ordinary  upholder  of  the 
classic  doctrine  would  have  been  somewhat  taken  aback 
even  by  the  first  part  of  George's  attack.  Doubtless  he 
would  have  found  it  still  less  easy  to  give  a  prompt  answer 
to  the  objection  in  its  second  form.  For  in  this  reasoning 
as  to  capital  in  good  times  and  in  bad  times,  the  term 
"  capital  "  is  used  with  that  vagueness  which  was  so  char- 
acteristic of  the  usual  statements  of  the  wages  fund  doc- 
trine :  the  quantity  of  capital  being  noticed  as  having  a 
bearing  both  on  wages  and  on  interest,  with  no  great  dis- 
crimination as  to  the  how  and  why  in  either  case.  In  fact, 
looking  simply  at  the  surface  phenomena  of  money  wages 
and  of  the  money  market,  it  is  easy  to  see  that  capital 
means  different  things  in  the  two  cases.  In  relation  to 
money  wages,  it  refers  to  the  total  money  funds  turned 
over  by  employers  to  the  hire  of  laborers  ;  in  the  other, 
to  the  money  funds  in  the  hands  of  lenders,  chiefly  for 
short-time  loans,  and  offered  by  them  to  the  active  mana- 
gers of  business.  It  is  quite  conceivable  that  the  one  sort 


*  Cairnes  made  the  suggestion  in  answer  to  Longe,  and  not  directly 
with  reference  to  any  such  contention  as  was  made  by  George. — Leading 
Principles,  Part  II,  ch.  i,  §  7. 


286  WAGES   AND   CAPITAL. 

of  fund  should  be  large  as  compared  with  the  laborers, 
while  the  other  should  be  small  as  compared  with  the 
borrowers.  At  best,  this  sort  of  consideration  gives  at- 
tention only  to  the  surface  phenomena, — to  money  wages 
on  the  one  hand,  and  on  the  other  to  the  bargaining  be- 
tween one  class  of  business  men  and  another.  Neither 
real  wages  nor  the  substantial  return  to  capital  at  large 
can  be  brought  into  clear  light  by  such  reasoning. 

There  is  another  side  to  this  particular  phase  of  the 
slow-dragging  discussion.  George  evidently  had  in  mind 
that  opposition  between  wages  and  profits  which  all  the 
followers  of  Ricardo  descanted  on  :  high  wages  made  low 
profits,  and  low  profits  high  wages.  The  connection  of 
this  theorem  with  the  wages  fund  doctrine  has  been 
touched  on  already.*  The  manner  in  which  it  led  George 
to  think  he  had  found  a  dilemma  is  not  far  to  seek.  A 
thinker  of  George's  slender  training,  absorbed  in  his  own 
panacea  for  the  cure  of  all  social  ills,  could  not  be 
expected  to  construe  with  accuracy  Ricardo's  involved 
expressions.  Wages,  like  other  words,  was  used  by  Ri- 
cardo in  a  peculiar  sense  :  he  meant  by  the  word  not 
money  wages,  not  even  real  or  commodity  wages,  but 
wages  as  representing  the  product  of  so  much  labor.  When 
Ricardo  said  wages  were  high,  he  meant  that  wages  got 
the  product  of  much  labor;  when  low,  the  product  of  lit- 
tle labor.  So  understood,  it  follows  very  simply  that  high 
wages  make  low  profits,  and  it  by  no  means  follows  that 
high  wages,  in  the  sense  of  high  commodity  wages,  make 
low  profits.  Ricardo's  proposition,  moreover,  applies 
only  to  the  relations  between  laborers  and  capitalists  in 
what  may  be  called  a  completed  cycle  of  production  :  it  ap- 
plies to  the  total  of  the  advances  made  to  a  given  series  of 
laborers  in  the  succession  of  seasons  over  which  their  pro- 


See  Ch.  IX,  pp.  168-172. 


CONTEMPORARY   DISCUSSION.  287 

ductive  labors  extend,  as  compared  with  the  total  of  fin- 
ished commodities  produced  by  this  series  during  the  cycle. 
It  has  nothing  to  do  with  that  part  of  the  advances  which 
happens  to  be  made  to  the  laborers  of  any  one  season  ; 
while  just  this  is  the  narrower  question  of  the  wages  fund 
and  of  market  wages.  Here,  as  on  other  topics,  Ricardo's 
definite  and  narrow  proposition,  stated  in  the  obscure 
fashion  of  its  author,  had  been  mechanically  repeated  by 
the  writers  of  the  next  generation,  and  had  been  applied 
to  all  sorts  of  cases  with  which  it  had  nothing  to  do. 
George  was  hardly  to  be  blamed  if  he  used  the  much- 
abused  formula  against  those  who  understood  its  real 
bearing  no  better  than  he. 

We  may  turn  now  to  the  positive  part  of  George's  rea- 
soning :  that  which  undertakes  to  show  that  wages  are 
paid  from  product. 

Here  the  basis  of  the  argument  may  be  stated  in 
George's  own  words.  "  The  fundamental  truth,  that  in 
all  economic  reasoning  must  be  firmly  grasped  and  never 
let  go,  is  that  society  in  its  most  highly  developed  form  is 
but  an  elaboration  of  society  in  its  rudest  beginnings,  and 
that  principles  obvious  in  the  simpler  relations  of  men  are 
merely  disguised  and  not  abrogated  or  reversed  by  the 
more  intricate  relations  that  result  from  the  division  of 
labor  and  the  use  of  complex  tools  and  methods."  Now 
the  first  laborers,  in  the  simplest  state  of  society,  must 
have  been  supported  from  the  product  of  their  own  labor; 
here  is  the  key  to  the  problem ;  all  laborers  are  paid  from 
the  product  of  their  own  labor. 

In  this  sort  of  reasoning,  George  doubtless  walks  in  a 
well-trodden  path.  Ricardo  had  reasoned  from  the  primi- 
tive fisherman  and  huntsman  to  the  fundamental  princi- 
ples of  value  and  exchange;  and  in  very  modern  specula- 
tions on  the  same  topic,  the  analysis  of  the  simplest  case 
is  supposed  to  supply  the  key  to  all  the  phenomena.  To 

20 


288  WAGES   AND   CAPITAL. 

give  such  reasoning  validity,  it  must  be  shown  that  there 
is  no  essential  difference  between  the  conditions  of  the 
simple  case  and  the  complex.  In  George's  deduction,  the 
primitive  workmen, — the  gatherer  of  shell-fish  or  of  ber- 
ries,— gets  a  consumable  commodity  in  the  interval  be- 
tween meals;  the  laborer  of  the  great  civilized  community 
does  work  which  may  not  result  in  enjoyable  goods  for 
years.  The  element  of  time  enters  in  the  one  case,  not  in 
the  other ;  the  difference  is  world-wide. 

Too  much  space  should  not  be  given  to  the  various 
turns  which  the  reasoning  took  at  George's  hands.  We 
are  told  that  laborers  always  produce  something  :  hence 
it  is  inferred  that  they  produce  what  they  live  on.  We 
are  given  a  vivid  description  of  "butter  churned  but  a 
few  days  before,  vegetables  fresh  from  the  garden,  and 
fruit  from  the  orchard";  as  if  all  these  commodities  had 
been  produced  by  present  labor.  We  are  told  that  the 
laborers  always  add  to  the  wealth  of  their  employers  be- 
fore pay-day  comes  around  ;  which  is  supposed  to  show 
that  they  are  paid  from  what  they  produce.*  In  truth,  the 


*  The  following  passage  may  be  cited,  as  characteristic  both  of  the 
swing  of  George's  style  and  the  quality  of  his  matter: 

"  Keeping  these  principles  in  view  we  see  that  the  draughtsman,  who 
shut  up  in  some  dingy  office  on  the  banks  of  the  Thames,  is  drawing  the 
plans  for  a  great  marine  engine,  is  in  reality  devoting  his  labor  to  the 
production  of  bread  and  meat  as  truly  as  though  he  were  garnering  grain 
in  California,  or  swinging  a  lariat  on  a  La  Plata  pampa  ;  that  he  is  as 
truly  making  his  o-^<n  clothing  as  though  he  were  shearing  sheep  in  Aus- 
tralia or  weaving  cloth  in  Paisley,  and  just  as  effectually  producing  the 
claret  he  drinks  at  dinner  as  though  he  gathered  the  grapes  on  the  banks 
of  the  Garonne." — Progress  and  Porcrty,  Book  I,  ch.  i,  p.  25. 

The  statement  in  the  first  half  of  this  neatly-balanced  sentence  would 
be  denied  by  no  economist  ;  but  the  insertion,  in  the  second  half,  of  the 
two  words  "  his  own  "  (which  George  docs  not  put  in  italics)  gives  an  en- 
tirely different  turn  to  the  matter.  The  draughtsman  makes  bread  and 
wine,  doubtless  ;  but  his  own  bread?  or  the  claret  lie  drinks  at  dinner? 


CONTEMPORARY   DISCUSSION. 


289 


vogue  of  Progess  and  Poverty  is  not  due  to  any  solid  and 
consistent  reasoning,  or  to  any  novelty  in  principle.  It  is 
a  consequence  of  the  tide  of  social  unrest,  on  which  an 
earnest  man,  made  eloquent  by  faith  in  a  gospel  of  his 
own,  has  been  carried  to  a  commanding  position  and  not 
undeserved  fame.  As  to  the  wages  fund  doctrine,  George's 
attacks  are  chiefly  significant  of  the  ease  with  which  the 
old  statements  could  be  shaken,  and  of  their  failure  to 
put  in  any  clear  light  the  basis  of  truth  and  fact  on  which 
the  doctrine  might  rest.  At  all  events  his  share  in  the 
controversy  had  little  visible  effect  on  the  development 
of  economic  theory.  Though  effective  in  shaking  the 
hold  of  the  old  doctrines  among  masses  not  usually 
touched  by  theoretic  controversy,  his  writings  exerted  no 
great  influence  on  trained  students;  a  result  due  in  part 
to  the  thinness  of  his  thought,  but  perhaps  quite  as  much 
to  the  ruthless  sweep  of  the  social  remedy  which  he  finally 
proposed. 

A  much  deeper  influence  on  the  course  of  thought 
has  been  exercised  by  the  other  American  writer  whom 
we  have  associated  with  George, — President  Francis  A. 
Walker.  This  distinguished  soldier,  scholar,  and  adminis- 
trator is  justly  regarded  with  respect,  and  with  something 
more,  by  his  associates  in  these  various  fields  of  activity. 
So  far  as  economic  science  is  concerned,  whether  or  no  all 
of  the  doctrines  and  measures  advocated  by  him  shall 
prove  to  stand  the  test  of  time,  no  one  can  deny  that  his 
independence  and  vigor  powerfully  stimulated  discussion 
at  a  time  when  something  very  like  stagnation  had  been 

The  reader  who  cares  to  follow  some  interesting  details  of  George's  rea- 
soning, may  compare  the  passage  which  descants  on  the  fresh  butter  and 
vegetables,  with  another,  in  the  preceding  chapter,  which  sets  forth  that 
"  it  is  not  the  last  blow,  any  more  than  the  first  blow,  that  creates  the 
value  of  the  finished  product." — Progress  and  Poverty,  Book  I,  ch.  iii, 
p.  58,  and  ch.  iv,  pp.  66,  67. 


290 


WAGES   AND   CAPITAL. 


reached  in  English-speaking  countries,  and  that  his  writ- 
ings in  many  ways  mark  the  beginning  of  a  new  and  fresh- 
er stage. 

President  Walker's  views  on  the  wages  fund  doctrine 
were  matured  at  a  comparatively  early  date.  They  are 
set  forth  in  an  article  in  the  North  American  Review  for 
January,  1875  ;  and  are  repeated  in  the  book  on  The  Wages 
Question,  published  in  1876.  They  appear  again  in  his  con- 
tributions to  more  recent  periodical  literature,  especially 
to  the  Quarterly  Journal  of  Economics,  and  in  the  various 
editions  of  his  text-book  on  political  economy.  The  later 
publications  handle  the  wages  fund  doctrine  in  a  some- 
what perfunctory  and  indeed  contemptuous  manner,  the 
assumption  being  more  or  less  explicitly  made  that  it  had 
already  received  its  coup  de grace.  Hence  the  earlier  discus- 
sions are  the  more  significant ;  and,  among  them,  the  two 
chapters  of  the  volume  on  The  Usages  Question  may  be 
selected,  as  containing  the  fullest  and  most  careful  state- 
ment of  the  author's  views.* 

First  in  order,  as  the  case  is  presented  in  that  volume, 
comes  a  statement  or  argument  that  may  be  readily  ac- 
cepted, but  hardly  bears  on  the  real  problem  in  hand. 
"An  employer  pays  wages  to  purchase  labor,  not  to  ex- 
pend a  fund  of  which  he  may  be  in  possession."  And 
again  :  "  The  employer  purchases  labor  with  a  view  to  the 
product  of  the  labor;  and  the  kind  and  amount  of  that 
product  determine  what  wages  he  can  afford  to  pay.  .  .  . 
It  is,  then,  for  the  sake  of  future  production  that  the 
laborers  are  employed,  not  at  all  because  the  employer 
has  possession  of  a  fund  which  he  must  disburse.  .  .  . 
Thus  it  is  production,  not  capital,  which  furnishes  the 


*  The  Wages  Question,  New  York,  1876  ;  chapters  viii  and  ix.  I  re- 
fer to  these  chapters  generally,  and  will  not  encumber  the  notes  with  de- 
tailed references. 


CONTEMPORARY    DISCUSSION. 


291 


motive  for  employment  and  the  measure  of  wages."  So 
much  is  unquestionably  true  ;  and  as  to  that  not  uncom- 
mon version  of  the  old  view,  by  which  the  individual  em- 
ployer is  supposed  to  have  funds  irrevocably  committed  to 
the  hire  of  his  laborers,  it  is  valid  and  unanswerable.  But 
the  argument  here  is  mainly  as  to  the  motive  which  influ- 
ences the  employer ;  and  it  may  be  readily  admitted  that 
the  attainment  of  a  product  at  a  profit  is  his  motive,  with- 
out any  admission  one  way  or  the  other  as  to  the  nature 
or  limitation  of  the  funds  which  pay  wages  or  form  the 
measure  of  wages. 

Next  comes  another  point.  An  objection  that  might 
come  from  an  upholder  of  the  old  view  is  stated  and  re- 
futed. "  It  may  be  said  :  we  grant  that  wages  are  really 
paid  out  of  the  product  of  current  industry,  and  that 
capital  only  affects  wages  as  it  first  affects  production,  so 
that  wages  stand  related  to  product  only  in  the  first  degree 
and  to  capital  in  the  second  degree  only;  still,  does  not 
production  bear  a  certain  and  necessary  ratio  to  capital  ? " 
This  question  Walker  rightly  answers  in  the  negative, 
pointing  out  that  production  is  affected  by  other  things 
than  the  volume  of  available  capital.  The  land,  the 
natural  resources,  the  industrial  quality  of  the  laborers, 
are  important  factors.  So  much  is  clearly  true ;  and  if  it 
be  granted  that  wages  are  primarily  determined  by  pro- 
duct, it  must  follow  that  they  are  affected  by  capital  only 
as  one  among  many  factors.  But  the  adherent  of  the 
old  view  would  never  make  the  supposed  admission,  or 
resort  to  the  supposed  reply.  The  kind  of  connection  be- 
tween wages  and  capital  which  is  to  be  disproved  is  the 
direct  and  immediate  one.  Wages  depend,  according  to 
the  old  view,  not  on  capital  via  product,  but  (if  on  product 
at  all)  then  on  product  via  capital  ;  and  the  connection 
with  the  capital  link  of  the  chain  is  not  to  be  brushed 
aside  as  lightly  as  this.  To  assume  that  wages  are  paid 


292 


WAGES   AND   CAPITAL. 


in  the  first  instance  from  product,  disposes  of  the  whole 
question  at  issue. 

This  assumption  becomes  clearer  in  an  illustration  pre- 
sented in  the  next  paragraph.  "  Given  machinery,  raw 
materials,  and  a  year's  subsistence  for  1,000  laborers,  does 
it  make  no  difference  with  the  annual  product  whether 
those  laborers  are  Englishmen  or  East  Indians  ?  "  Clearly 
the  question  is  to  be  answered  in  the  affirmative ;  the 
quality  of  the  laborers  does  affect  the  product.  But  the 
adherent  of  the  wages  fund  doctrine  would  point  out  that, 
by  supposition,  there  was  but  a  year's  subsistence  on 
hand;  and  he  would  suggest  that  this  was  the  "capital  " 
important  for  the  purposes  of  his  doctrine.  Until  a  new 
stock  of  subsistence  could  be  got, — which  presumably 
would  require  a  year, — the  laborers,  whether  Englishmen 
or  East  Indians,  could  get  no  more  than  there  was  to  be 
had.  Assuming  that  the  capital,  of  all  sorts,  was  owned 
by  a  set  of  employers,  and  that  the  only  way  for  laborers 
to  get  the  subsistence  on  hand  was  by  bargain  with  the 
employers,  the  rate  of  wages  during  the  first  year  would 
be  a  simple  matter  of  division.  These  assumptions,  as  to 
the  ownership  of  practically  all  wealth  by  one  class,  were 
made  rather  by  implication,  than  in  so  many  words,  by 
the  classic  writers;  but  they  should  fairly  be  accepted  for 
the  purposes  of  their  reasoning,  and  make  it  difficult,  as 
to  the  first  year's  wages  in  such  a  case  as  Walker  sup- 
poses, to  find  a  flaw  in  that  reasoning.  The  growth  of 
capital,  after  the  first  year,  under  the  influence  of  high 
profits,  might  make  probable  a  new  supply  of  subsistence 
and  other  things,  and  an  eventual  adjustment  of  wages  to 
product.  But  this  is  very  different  from  the  direct  de- 
termination of  wages  by  "current  product,"  which  is  as- 
sumed as  the  basis  of  Walker's  argument,  and  is  by  no 
means  proved  as  the  result  of  it.  Whether  a  case  like 
that  here  supposed,  with  its  fixed  year's  subsistence,  is 


CONTEMPORARY   DISCUSSION. 


293 


typical  of  the  real  course  of  production  and  distribution 
in  modern  communities,  or  even  instructive  in  their 
analysis,  is  another  matter.  So  far  as  the  wages  fund 
doctrine  goes,  the  example  is  of  the  sort  that  serves  to 
strengthen  more  than  to  weaken  it. 

The  assumption  of  the  thing  to  be  proved,  which  ap- 
pears in  this  argument  as  to  the  industrial  quality  of  the 
laborers,  is  made  again  in  the  next  chapter  :  where  it  is 
pointed  out  in  more  detail  and  with  more  emphasis,  that 
the  nature  of  the  soil,  the  possibility  of  a  stage  of  increas- 
ing rather  than  diminishing  returns  from  land,  the  course 
of  invention,  the  growing  division  of  labor,  may  result  in 
changes  in  product  connected  but  loosely  with  changes  in 
capital.  Thence  it  clearly  follows  that  these  things 
directly  affect  wages,  if  product  directly  determines  wages. 
Such  reasoning,  to  repeat,  may  be  set  aside,  as  not  per- 
tinent to  the  case  ;  and  we  may  concentrate  attention  on 
the  arguments  which  really  touch  the  points  at  issue, — the 
relation  of  capital  to  wages,  the  extent  to  which  advances 
are  made  from  capital,  and  the  exact  mode  in  which 
wages  are  paid  out  of  product  or  capital. 

President  Walker's  attempt  to  deal  with  this  crucial 
question  begins  with  the  proposition  that,  while  "  wages  are 
to  a  very  considerable  extent,  in  all  communities,  advanced 
out  of  capital,"  they  "must  in  any  philosophical  view  of 
the  subject  be  regarded  asjtozd'out  of  the  product  of  cur- 
rent industry."  What  is  meant  by  a  "  philosophical  view  " 
is  not  quite  clear.  It  can  hardly  mean  that  wages,  while 
in  fact  paid  out  of  capital,  are  to  be  philosophically  re- 
garded as  paid  out  of  something  else;  though  such  an  in- 
terpretation might  be  consistent  with  some  of  the  specu- 
lations presented  by  philosophers  of  all  ages.  It  may 
mean  that  wages  are  paid  of  product,  not  indeed  for  the 
time  being,  but  in  the  long  run.  Yet  in  this  sense  there 
is  nothing  essentially  inconsistent  with  the  wages  fund 


294 


WAGES   AND   CAPITAL. 


doctrine.  We  have  seen  that  Cairnes's  conception  of 
profits  as  always  within  a  handbreadth  of  the  minimum, 
and  as  certain  to  be  kept  there  by  prompt  accumulation 
consequent  on  higher  profits,  means  simply  that  wages 
are  determined,  in  not  a  very  long  run,  by  product :  while 
yet  Cairnes  holds  them  to  be  proximately  determined  by 
the  capital  available  for  paying  wages.  It  must  be  said 
that  Walker  appears  not  to  be  fairly  conscious  of  this 
turn  of  the  older  reasoning,  and  sometimes  speaks  in  a 
manner  to  imply  that  he  too  believes  wages  to  depend  on 
product  in  the  indirect  way  there  stated.  Thus  in  the 
second  of  the  two  chapters  now  under  consideration,  we 
are  told  that  "  it  is  the  prospect  of  a  profit  in  production 
which  determines  the  employer  to  hire  laborers;  it  is  the 
anticipated  value  of  the  product*  which  determines  how  much 
he  can  pay  him," — a  phrase  which  might  be  interpreted  to 
mean  in  substance  very  much  what  a  writer  like  Cairnes 
would  lay  down  on  the  theory  of  wages. 

But  Walker  at  bottom  means  something  different  from 
this:  "current  product  "  is  the  phrase  which  he  prefers  in 
describing  the  source  whence  wages  are  paid  ;  the  advance 
from  capital  is  an  accident  ;  and  we  must  inquire  further 
as  to  his  conception  of  the  advance  from  the  one  source 
and  the  payment  from  the  other. 

"  In  all  communities  wages  are,  by  the  very  necessity 
of  the  case,  advanced  to  a  very  considerable  extent  out  of 
capital.  .  .  .  The  tiller  of  the  soil  must  abide  in  faith  of  a 
harvest,  through  months  of  ploughing,  sowing,  and  culti- 
vating ;  and  his  industry  is  only  possible  as  food  has  been 
stored  up  from  the  crop  of  the  previous  year.  The  me- 
chanical laborer  is  also  removed  by  a  longer  or  shorter 
distance  from  the  fruition  of  his  labor.  So  that  almost 


*  The  italics  in  this  passage,   and  in  others    quoted    later,  are  not 
President  .Walker's. 


CONTEMPORARY   DISCUSSION.  295 

universally,  it  may  be  said,  the  laborer  as  he  works  is  fed 
out  of  a  store  gathered  by  previous  toil,  and  saved  by  the 
self-denial  of  the  possessor."  Much  seems  here  to  be 
conceded  to  the  old-fashioned  economists.  Almost  uni- 
versally, laborers  are  supported  by  the  product  of  past 
labor;  and  the  source  whence  they  get  their  support  is 
conceived  to  be  food  and  other  tangible  things  of  a  pre- 
vious season's  making. 

But  this  admission  is  at  once  limited:  "  to  the  extent  of 
a  year  s  subsistence,  then,  it  is  necessary  that  some  one  should 
stand  ready  to  make  advances  to  the  wage-laborer  out  of 
the  products  of  past  industry."  And  only  subsistence  need 
be  provided  :  "  this  by  no  means  involves  the  payment  of 
his  entire  wages  in  advance  of  the  harvesting  of  the  crop 
or  the  marketing  of  the  goods."  Here  we  have  the  be- 
ginning of  a  shift  in  the  point  of  view  :  the  "  marketing  of 
the  goods  "  appears  as  the  last  stage  in  production.  Al- 
most at  once,  thereafter,  it  is  questioned  whether  wages 
are,  after  all,  largely  advanced  out  of  capital ;  for  the 
laborer  does  not  get  his  money  until  after  he  has  done  his 
work  for  the  employer,  or  indeed  after  the  employer  has 
sold  the  product.  The  employer  may  "  realize  "  on  his 
product  before  he  pays  wages  to  the  workmen.  Railways 
and  steamboats  are  instanced  as  collecting  cash  daily,  /.  <?., 
securing  their  "product,"  while  paying  wages  monthly. 
"  Quite  as  common,  probably,  even  yet  in  countries  which 
we  may  call  old,  as  weekly  payments  are  monthly  pay- 
ments;  and  here  the  probability  that  the  laborer  may  re- 
ceive his  wages  out  of  the  price  of  this  marketed  product  in- 
creases with  the  quadrupled  time  given  the  employer  to 
dispose  of  it." 

Observe  the  gradual  transition  here.  First,  we  have 
the  tiller  of  the  soil,  who  gets  his  food, — his  real  wages, — 
from  the  labor  of  the  past.  Here  the  securing  of  a  con- 
sumable commodity  is  regarded  as  the  last  stage  in  com- 


296 


WAGES  AND   CAPITAL. 


pleting  the  product.  Next,  we  have  the  harvesting  of  the 
crop,  without  precise  statement  as  to  when  this  harvesting 
brings  a  "  product  "  and  yields  wages  :  whether  at  the  stage 
when  bread  is  finally  got,  or  at  that  when  the  crop^  of 
grain  is  sold.  Last,  we  have  the  money  view  full  fledged : 
the  "  marketing  "  of  the  goods  and  the  "  price  "  of  the 
product  are  described  as  yielding  wages.  It  is  the  old  story 
in  the  wages  fund  controversy:  sale  and  money  receipt 
are  confounded  with  the  final  attainment  of  food  and 
other  enjoyable  goods,  and  the  fund  whence  wages  are 
paid  is  conceived  as  money  or  cash  in  the  hands  of  the  in- 
dividual employer. 

The  railway  company  is  said  to  pay  wages  out  of  prod- 
uct because  it  takes  in  cash  before  pay-day;  though 
clearly  its  real  product  is  the  transporting  of  goods  or 
men  from  one  place  to  another,  and  so  ordinarily  no  more 
than  the  advancement  of  productive  operations  by  one 
small  stage.  The  manfacturer  who  sells  pig  iron  (say), 
pays  his  laborers  out  of  the  price  of  the  product ;  yet  the 
pig  iron  can  not  become  a  product,  in  the  sense  of  being 
eaten  and  enjoyed,  of  satisfying  any  human  want,  until  a 
long  succession  of  further  steps  are  taken  with  it.  Presi- 
dent Walker  might  fairly  argue  that,  for  polemical  and 
negative  purposes,  he  was  justified  in  using  "  product  "  in- 
differently in  the  two  senses  here  noted  ;  because  those  who 
had  long  maintained  and  expounded  the  wages  fund  doc- 
trine so  often  confined  themselves  to  the  money  view  of 
capital  and  product.  But  for  progress  in  getting  at  the 
truth  of  the  matter,  reasoning  which  confounds  these  two 
things  leaves  matters  in  as  ill  plight,  at  the  least,  as  they 
were  before. 

One  further  case,  much  made  of  by  Walker,  may  be 
considered,  because  it  presents  the  same  question  in  a 
somewhat  different  way.  Among  the  facts  of  concrete 
industry  which  he  finds  inconsistent  with  any  necessary  or 


CONTEMPORARY   DISCUSSION.  297 

universal  advance  of  wages  out  of  capital,  are  cases  of 
partial  advances  of  wages  by  employers.  In  the  South 
and  West  of  the  United  States,  at  the  time  of  his  writing^ 
he  notes  that  "the  employer  advances  to  the  laborer  such 
provisions  and  cash  as  are  absolutely  required  from  time 
to  time  ;  but  the  '  settlement '  does  not  take  place  until 
the  close  of  the  season  or  of  the  year,  and  final  payment 
is  often  deferred  until  the  crop  is  not  only  harvested  but 
sold."  Here  the  provisions  and  cash  first  turned  over  in 
part  payment  are  apparently  regarded  as  coming  from 
capital ;  while  the  cash  paid  when  the  crop  is  sold,  comes 
from  product.  Yet  it  is  obvious,  if  we  once  get  beyond 
the  money  point  of  view,  that  the  cash  advanced  out  of 
capital  is  spent  on  finished,  consumable  commodities;  and 
the  cash  paid  out  of  the  product,  or  crop  sold,  is  spent  on 
like  commodities;  that  in  either  case  these  commodities 
constitute  the  real  wages,  whose  amount  and  determina- 
tion it  is  important  to  ascertain.  What  we  need  to  know 
is  whether  these  consumable  things,  whenever  secured, 
and  whether  bought  with  money  on  hand  before  or  after 
the  sale  of  the  crop,  are  to  be  regarded  as  product  or 
capital ;  whether  they  are  the  current  product  of  the  labor- 
ers who  buy  them  and  enjoy  them  ;  whether  they  are  rigid 
or  flexible  in  amount.  These  essential  questions  Presi- 
dent Walker  nowhere  touches.* 


*  The  same  sort  of  case  is  described  in  more  detail  as  to  farmer's  ac- 
counts, chiefly  in  New  England,  at  an  earlier  date.  Here  President 
Walker  finds  the  hands  charged  with  "advances  of  the  most  miscellane- 
ous character.  There  are  charges  for  grain  and  salted  meats  from  the 
product  of  the  previous  year,  for  cash  for  minor  personal  expenses,  for 
bootmaker's  bills,  grocer's  bills,  apothecary's  bills,  doctor's  bills,  and 
even  town-tax  bills,  settled  by  the  employer,  for  the  use  of  teams  for 
hauling  wood  for  the  laborer  or  breaking  up  his  garden  in  the  spring. 
Yet  in  general  the  amount  of  such  advances  does  not  exceed  one-third, 
and  it  rarely  reaches  one-half,  of  the  stipulated  wages  for  the  year."  The 


298 


WAGES   AND   CAPITAL. 


The  proposition  that  wages  are  paid  out  of  product, 
supported  in  this  unsatisfactory  way,  became  the  starting- 
point  of  President  Walker's  theory  of  distribution,  set 
forth  in  his  text-books,  now  so  much  in  vogue  in  English- 
speaking  countries.  It  simplifies  the  perplexing  problems 
so  temptingly  ;  it  is  so  obviously  true  of  the  individual 
employer  and  of  those  direct  wages  which  he  pays  his 
men  in  money,  and  which  every  one  first  thinks  of  when 
questions  about  wages  confront  him  in  concrete  life, — that 
we  need  not  be  surprised  if  the  theories  of  distribution 
which  rest  on  it,  presented  as  they  are  with  rare  skill  in 
exposition,  are  found  eminently  teachable  and  a  welcome 
substitute  for  the  older  beclouded  views.  But  they  do 
not  really  solve  the  problems  in  hand.  Certainly,  so  far 
as  the  wages  fund  doctrine  was  concerned,  this  attempt  at 
revision  settled  nothing.  There  is  indeed  a  sense  in 
which  it  is  true  that  real  wages,  like  real  interest  and  real 
rent  and  real  business  earnings,  are  paid  out  of  current 
product.  But  as  a  first  step  in  the  theory  of  distribution, 
the  proposition  that  wages  are  derived  from  current  prod- 
uct gives  an  inaccurate  picture  of  the  ways  and  processes 
of  production  ;  while  the  determination  of  wages  as  a 
residual  share  is  even  more  unreal  than  its  supposed  pay- 
ment out  of  product.  President  Walker's  service  in  the 
wages  fund  discussion,  and  in  economic  theory  at  large, 
has  been  rather  that  of  compelling  a  thorough  overhaul- 
ing of  old  views  than  that  of  substituting  a  new  economic 
system  of  solid  and  permanent  value. 

Nevertheless,   the  general   theory  of    distribution    set 

remaining  two-thirds  or  one-half,  we  are  given  to  infer,  are  not  advanced 
by  the  employer,  but  paid  out  of  product.  It  is  hardly  necessary  to 
point  out  that,  whether  grocers'  bills  are  settled  by  the  employer  before 
pay-day  or  by  the  laborer  after,  the  real  source  of  wages  is  the  same, — 
the  stock  of  goods  held  by  such  dealers,  which  in  neither  case  are  the 
laborer's  product. 


CONTEMPORARY   DISCUSSION. 


299 


forth  by  Walker  gained  an  acceptance  and  influence  prob- 
ably greater  than  that  of  any  writings  in  the  English 
tongue  since  the  days  of  the  younger  Mill.  The  text- 
books in  which  they  were  set  forth  came  into  very  wide 
use  ;  and  the  virtual  adherence  of  a  large  circle  of  eminent 
economists  was  a  proof  of  more  solid  success.  Jevons  in 
England  had  reached  similar  general  views  at  a  somewhat 
earlier  date,  and  readily  fell  into  line.*  Professor  Sidg- 
wick,  the  weight  of  whose  opinion  was  deservedly  great, 
adopted  the  same  mode  of  approaching  the  theory  of  dis- 
tribution, and  the  same  general  conclusions  as  to  wages. f 
Followers  were  many,  and  dissidents  few,  in  English- 
speaking  countries.  In  France,  where  the  old  rigid  views 
had  never  had  much  vogue,  the  new  ones  were  welcomed 
by  a  considerable  and  influential  circle;  though  some- 
times with  a  certain  Gallic  courtesy  in  the  admission  of  a 
degree  of  truth  on  both  sides,  which  made  it  difficult  to 
classify  the  French  writers  in  one  way  or  the  other.  The 
controversy  waxed  hot  in  Italy,  where  the  books  both  of 
Cairnes  and  of  Walker  were  translated,  and  a  long  series 
of  books  and  of  articles  in  periodicals  maintained  the 
views  of  the  old  school  and  of  the  new.  Among  the  Ger- 
mans less  attention  was  given  to  the  controversy ;  not 
because  the  old  views  held  their  own  with  any  tenacity, 
but  because,  in  this  case,  the  Germans  were  singularly 
neglectful  of  an  important  phase  in  the  development  of 
economic  thought.  On  the  whole,  the  trend  of  the  dis- 
cussion for  a  decade  or  more  was  such  as  to  justify  Presi- 
dent Walker  in  the  assumption  that  there  was  nothing  left 
of  the  wages  fund  doctrine,  that  the  payment  of  wages 


*  Jevons's  Theory  of  Political  Economy,  second  edition,  p.  2g2.  See 
also  the  Preface,  p.  xlviii  ;  and  Jevons's  State  in  Relation  to  Labotir,  p. 
94.  Compare  what  is  said  of  Jevons  in  later  parts  of  this  chapter. 

f  Sidgwick's  Principles  of  Political  Economy,  Book  II,  ch.  viii,  §  5. 


300 


WAGES   AND   CAPITAL. 


from  current  product  was  an  established  theorem,  and 
that  the  problems  still  unsolved  were  concerned  with  the 
details  of  the  share  in  this  current  product  which  went  to 
laborers.* 

Meanwhile  another  current  of  thought  was  being 
brought  to  bear  on  the  wages  fund  discussion,  from  a 
very  different  quarter,  and  with  very  different  objects 
and  results.  The  speculations  which  are  associated  with 
the  Austrian  school,  while  directed  mainly  to  the  phe- 
nomena of  value  and  exchange,  have  also  led  to  impor- 
tant attempts  at  the  reconstruction  of  the  theory  of  capi- 
tal, and  these  again,  explicitly  or  implicitly,  to  a  recon- 
sideration of  the  theory  of  wages. 

We  are  concerned  here  only  with  that  part  of  the  gen- 
eral theory  of  value  developed  by  the  new  school  which 
bears  on  capital  and  wages.  The  value  of  all  economic 
goods, — to  recall  summarily  the  essentials  of  the  new 
views, — is  defined  as  their  "importance"  to  the  person 
whose  wants  they  are  to  satisfy ;  and  the  exchange  value 
of  goods  is  made  to  depend  on  the  play  of  such  subjective 
importance  in  the  minds  of  those  who  sell  and  buy.  The 
diminishing  importance  of  successive  increments  of  any 
one  commodity  leads  to  the  theory  of  final  or  marginal 
utility;  and  final  utility  becomes  the  main  force  acting 
directly  on  exchange  value.  It  is  probable  that  in  this 
train  of  speculation,  undue  attention  has  been  given  to 
suppositions  of  fortuitous  barter,  in  which  the  seller  has 
possession  of  articles  which  might  be  used  by  himself; 
whereas  too  little  attention  has  been  given  to  the  condi- 
tions of  an  advanced  division  of  labor,  in  which  the  pro- 

*  A  convenient  summary  of  the  views  of  a  series  of  writers,  and 
especially  of  modern  French  and  Italian  economists,  is  given  in  Professor 
Aldo  Contento's  La  7 eoria  del  Salario  ncl  Concetto  dci  Principal! 
Economisti  (Venice,  1894). 


CONTEMPORARY    DISCUSSION.  301 

ducers  and  sellers  practically  want  none  of  the  articles 
they  make,  and  in  which  final  utility  to  buyers  alone  has 
effect  on  the  exchange  values  of  commodities.  It  is  part 
of  the  same  defect  that  the  consequences  of  the  changing 
quantities  offered  by  producers  under  the  stress  of  com- 
petition, have  been  unduly  thrust  in  the  background.  But 
these  are  matters  not  material  for  the  present  inquiry. 
For  this,  the  essential  thing  is  that  value  is  conceived  as 
affected  primarily,  not  by  the  cost  of  articles,  but  by  their 
importance,  or  final  utility,  as  means  of  satisfying  human 
wants. 

The  direct  satisfaction  of  wants  being  thus  the  start- 
ing-point in  the  inquiry,  it  was  inevitable  that  attention 
should  be  turned  to  the  fact  that  a  great  mass  of  goods 
do  not  serve  directly  for  such  satisfaction.  Inchoate 
goods,  not  ready  for  enjoyment,  have  in  themselves  no 
importance  or  utility.  They  serve  wants  only  by  being 
converted  into  commodities  capable  of  yielding  direct 
satisfaction.  Hence  they  find  their  place  in  the  revised 
theory  of  value  as  having  a  "  derived  "  importance  and  util- 
ity, dependent  on  the  importance  and  utility  of  the  en- 
joyable commodities  which  they  serve  to  make.  This 
train  of  thought  led  naturally  to  the  consideration  of 
the  interval  of  time  that  must  elapse  for  the  conver- 
sion of  inchoate  goods  into  completed  commodities;  and 
this  again  to  the  relation  of  present  labor  to  present 
product,  the  functions  of  capital,  and  that  whole  series  of 
inquiries  as  to  the  nature  of  civilized  production,  which 
had  been  so  long  and  so  unhappily  divorced  from  the  dis- 
cussion of  the  wages  fund. 

Some  of  the  more  significant  steps  in  the  development 
of  this  train  of  thought  may  now  be  mentioned  ;  with  a 
view  not  to  sketch  the  history  of  the  new  doctrines,  but  to 
point  out  how  they  have  tended  to  give  a  new  course  to 
the  discussion  of  wages.  At  the  outset  there  was  no  hint 


302 


WAGES   AND   CAPITAL. 


of  connecting  them  with  the  old-fashioned  theory  of 
wages;  and  the  unexpected  manner  in  which  they  finally 
came  to  connect  themselves  with  the  old  views,  is  one 
illustration  the  more  of  the  slow  and  faltering  steps  by 
which  even  the  shrewdest  of  men  must  feel  their  way  to 
the  results  of  a  departure  from  familiar  lines  of  thought. 

The  first  careful  and  deliberate  statement,  in  the  terms 
of  the  new  doctrine,  of  the  relation  of  dependence  between 
enjoyable  and  inchoate  wealth  seems  to  have  been  made 
by  Gossen.  The  work  of  this  erratic  genius  bore  little 
fruit  at  the  moment,  and  perhaps  had  no  marked  influence 
on  the  subsequent  course  of  thought;  but  it  may  be  re- 
ferred to  as  an  indication  of  the  mode  in  which  the  re- 
modelled theory  of  value  gradually  connected  itself  with 
the  subject  of  wages  and  capital.*  Gossen  worked  out  the 
theory  of  subjective  value,  of  diminishing  subjective  value 
with  the  increase  of  quantity,  and  so  of  final  utility  ;  and  ap- 
plied to  these  topics  the  mathematical  treatment  to  which 
they  lend  themselves  so  naturally.  What  is  more  pertinent 
to  our  subject,  he  divided  goods  into  different  classes,  ac- 
cording to  their  availability  for  the  satisfaction  of  human 
wants.  The  classes  were  three  :  (i)  consumable  goods  ready 
for  enjoyment ;  (2)  goods  not  having  all  the  adaptations 
necessary  for  enjoyment,  as  wheat  and  rye,  which  need  to 
be  made  into  bread,  or  a  carriage,  which  needs  a  horse  and 
driver  before  sufficing  for  final  satisfaction  ;  (3)  goods 

*  Hermann  Heinrich  Gossen,  Entwickelung  der  Gcsefze  des  Mensch- 
Kchen  Verkehrs,  Braunschweig,  1854.  As  to  Gossen's  position  in  the 
attempts  to  apply  mathematical  methods  to  economics,  see  the  generous 
notice  in  the  second  edition  of  Jevons's  Theory  of  Political  Economy, 
Preface,  pp.  xxxv-xlii.  As  to  his  position  in  the  development  of  the 
psychological  theory  of  value,  see  the  notes  in  Pantalconi's  Principii  dl 
Economia  Politica,  pp.  38,  96,  105  ;  where,  however,  the  cordial  recog- 
nition of  Gossen's  merits  leads  to  some  undue  depreciation  of  later  think- 
ers of  the  same  school. 


CONTEMPORARY    DISCUSSION. 


303 


which  serve  to  make  other  goods,  but  never  themselves 
minister  to  enjoyment,  as  tools  and  machines,  and  fuel 
consumed  to  make  power.  This  classification,  whether  or 
no  advantageous  for  the  inquiries  which  Gossen  conducted, 
would  not  be  satisfactory  for  an  investigation  of  the  suc- 
cessive steps  in  production  :  for  the  carriage  (which  is 
ready  for  use)  and  the  wheat  (which  still  needs  to  be 
ground)  are  put  together  by  Gossen,  yet  stand  in  different 
stages ;  while  the  fuel  and  the  wheat  may  belong  close 
together.  But  Gossen  was  concerned  only  with  the  de- 
pendence of  the  various  incomplete  goods,  for  their  effect- 
iveness in  satisfying  wants,  on  the  finished  commodities; 
for  this  purpose  his  divisions  may  be  helpful,  and  at  all 
events  they  brought  out  clearly  the  chain  of  connection. 
A  point  most  essential  for  the  theory  of  wages  and  capi- 
tal was,  however,  not  touched  by  him  :  the  interval  of 
time  between  the  successive  links  in  the  chain.  The  idea 
of  a  succession  in  time  between  the  several  classes  of 
goods  seems  not  to  have  been  in  Gossen's  mind,  and  cer- 
tainly was  not  made  prominent  by  him.  This  first  step  in 
the  psychological  theory  of  value  thus  did  not  bring  into 
view  that  aspect  of  it  which  connects  it  with  the  theory  of 
wages  and  capital. 

It  is  curious  that  the  next  writer  who  followed  the 
methods  of  Gossen  in  general  economics,  while  again  con- 
tributing virtually  nothing  to  the  direct  application  of  the 
new  reasoning  in  the  theory  of  wages,  yet  also  promoted 
that  application  indirectly.  Jevons,  in  his  Theory  of  Po- 
litical Economy,  of  which  the  first  edition  appeared  in  1871, 
worked  out,  independently  and  originally,  the  reasoning 
as  to  the  general  dependence  of  exchange  value  on  final 
utility,  and  essayed  with  equal  originality  the  application 
of  mathematical  methods  to  economics.  In  addition,  he 
said  some  things  that  were  true  and  important,  even  if  not 
entirely  novel,  on  the  theory  of  capital.  But  the  theory 


304 


WAGES   AND   CAPITAL. 


of  final  utility  did  not  lead  Jevons  to  consider  the  differ- 
ent ways  in  which  inchoate  goods  and  enjoyable  commodi- 
ties satisfy  human  wants  ;  and  he  was  thus  prevented  from 
making  any  satisfactory  application  of  his  new  methods 
to  the  problem  of  general  wages,  or  at  least  that  part  of 
the  problem  of  general  wages  with  which  the  wages  fund 
discussion  is  concerned. 

While  no  classification  of  goods  according  to  the 
nearer  or  remoter  fruition  of  enjoyment  appears  in  Jev- 
ons, an  essential  function  of  capital  is  there  grasped  and 
stated  with  a  directness  which  is  refreshing  after  the  long 
series  of  vague  generalities  among  his  English  predeces- 
sors, and  which  had  its  strong  effect  on  later  thinkers  of 
the  same  school.  Jevons  lays  it  down  that  capital  is 
nothing  but  subsistence  :  it  serves  only  to  feed  laborers 
over  a  lengthened  process  of  production.  The  element  of 
time  is  its  essence.  He  states  in  italics  that  its  effect  is 
"  to  allow  us  to  expend  labour  in  advance."  Not  only  is  this 
fundamental  fact  emphasized,  but  the  further  fact  is 
noted  (though  not  so  fully)  that  there  is  connection  be- 
tween the  supply  of  capital,  the  march  of  improvement, 
and  the  length  of  time  over  which  the  period  of  produc- 
tion extends.  "Whatever  improvements  in  the  supply  of 
commodities  lengthen  the  average  time  between  the  mo- 
ment when  labor  is  exerted  and  its  result  or  purpose  is 
accomplished,  such  improvements  depend  on  the  use  of 
capital.  And  I  would  add,  that  this  is  the  sole  use  of  capi- 
tal." Here  the  conception  of  an  average  duration  of  the 
period  of  production,  and  the  function  of  capital  in  the 
lengthened  course  of  production,  are  clearly  set  forth.* 

This  is  not  new  doctrine  ;  but  it  is  stated  with  fresh 
and  needed  emphasis,  and  indeed  is  soon  carried  almost 
too  far.  We  have  seen  that  the  analysis  of  capital  as  a 

*  Theory  of  Political  Economy,  ch.  vii,  especially  pp.  243,  245,  248. 


CONTEMPORARY   DISCUSSION.  305 

succession  of  advances  of  food  to  laborers  was  at  the 
basis  of  Ricardo's  reasoning  as  to  value  and  as  to  distri- 
bution. It  was  set  forth  more  or  less  distinctly  by  most 
of  his  followers.  But  it  had  been  often  buried  under 
other  matter,  and  obscured  by  deductions  that  were  half 
true  or  applications  that  were  false  ;  and  it  had  hardly 
ever  been  brought  into  clear  connection  with  the  wages 
fund  doctrine.  Thus  it  needed  to  be  simply  and  emphat- 
ically restated  and  reapplied.  But  Jevons  did  no  more 
than  restate  it,  and  took  no  further  steps  in  its  applica- 
tion. Indeed,  he  may  be  said  to  have  stepped  back  ;  for 
not  only  did  he  lay  it  down  that  all  capital  is  subsistence, 
— which  is  true  if  properly  explained, — but  he  came  peril- 
ously near  to  saying  that  all  which  is  not  subsistence 
is  not  capital, — which  requires  still  more  explanation  to 
be  intelligible  and  true.  "  I  would  not  say  that  a  railway 
is  fixed  capital,  but  that  capital  is  fixed  in  the  railway. 
The  capital  is  not  the  railway,  but  the  food  of  those  who 
made  the  railway."*  Elsewhere  Jevons  approaches  the 
subject  from  a  different  point  of  view,  and  with  a  result 
substantially  the  same  :  maintaining  that  all  forms  of 
wealth,  whether  completed  or  uncompleted,  whether  in 
consumer's  hands  or  not,  are  equally  capital. f  His  views, 
in  truth,  were  not  fully  developed.  He  did  not  affect,  in 
this  volume  on  the  theory  of  economics,  to  have  reached 
definitive  conclusions  on  the  subject  at  large.  He  was 
concerned  chiefly  with  advocating  a  new  method  and  a 
new  point  of  view  :  the  method  of  mathematics,  and  the 
point  of  view  of  final  utility.  On  capital,  he  had  no  well- 
matured  opinions,  and  thus  did  no  more  than  to  redirect 
attention  to  its  connection  with  the  lapse  of  time  between 
the  beginning  and  the  end  of  productive  exertion. 

*  Theory,  p.  264. 

f  Compare  what  was  said  on  this  topic  in  Part  I,  Chapter  II,  p.  39. 


306  WAGES   AND   CAPITAL. 

This  failure  to  mature  his  conclusions  appears  strik- 
ingly in  what  Jevons  says  specifically  of  the  wages  fund 
doctrine.  That  doctrine  he  professes  to  reject ;  yet  with 
qualifications  which,  while  professing  to  save  something, 
show  that  he  did  not  really  see  what  was  good  in  it  and 
what  bad.  He  sets  forth  in  general  a  residual  theory  of 
wages.  The  laborers  are  paid  from  product  and  get  what 
is  left  after  interest  and  rent  are  provided  for.  He  quali- 
fies this  by  noting  a  temporary  stage  during  which  the 
wages  fund  theory  applies.  Such  temporary  application 
of  the  wages  fund,  however,  has  nothing  to  do  with  that 
lapse  of  time  between  the  beginning  and  the  end  of  pro- 
duction which  he  emphasized  in  his  earlier  analysis  of 
capital.  It  has  to  do  with  a  much  briefer  period.  During 
the  early  stages  of  new  enterprises  or  new  industries,  in- 
volving risks  and  uncertain  profits,  he  finds  that  the  an- 
ticipated outcome  of  the  enterprise,  rather  than  the  actual 
product  secured,  will  determine  wages.  This  anticipated 
result  will  determine  how  much  capitalists  will  then  pay 
out  to  laborers.  Only  during  this  temporary  stage  of 
risk  and  uncertainty,  he  conceives  the  wages  fund  to 
be  in  operation.  But  when  stable  conditions  are  reached, 
and  it  is  known  what  the  outcome  of  a  business  enterprise 
is  to  be — and  such  is  assumed  to  be  the  usual  and  normal 
state  of  things — the  laborer  will  receive  "  the  due  value  of 
his  produce  after  paying  a  proper  fraction  to  the  capitalist 
for  the  remuneration  of  abstinence  and  risk."* 


*  Theory,  pp.  292,  294,  295.  The  significant  parts  of  these  passages 
may  be  quoted  :  "  It  is  the  proper  function  of  capital  to  sustain  labour 
before  the  result  is  accomplished,  and  as  many  branches  of  industry  re- 
quire a  large  outlay  long  previous  to  any  definite  result  being  arrived  at, 
it  follows  that  capitalists  must  undertake  the  risk  of  any  branch  of  indus- 
try where  the  ultimate  profits  are  not  known.  But  we  have  now  some 
clue  as  to  the  amount  of  capital  which  will  be  appropriated  to  the  pay- 
ment of  wages  in  any  trade.  The  amount  of  capital  will  depend  on  the 


CONTEMPORARY   DISCUSSION.  307 

This  curious  and  indeed  unique  version  of  the  appli- 
cability of  the  wages  fund  is  completely  divorced  from 
what  Jevons  had  said,  a  few  pages  before,  of  the  function 
of  capital  and  its  relation  to  time  in  production.  As  a 
statement  of  the  final  outcome  of  distribution,  it  is  much 
the  same  as  what  would  be  laid  down  by  either  Cairnes  or 
Walker, — in  fact,  by  any  writer  who  believed  the  return 
to  capital  to  be  sharply  fixed  by  a  minimum  reward  for 
abstinence.  It  is  not  very  material,  for  this  ultimate  re- 
sult, whether  wages  are  conceived  to  be  paid  from  capital 
or  from  product.  But  as  to  the  process  whereby  the  re- 
sult is  brought  about,  if  at  all,  it  is  very  material  to  re- 
member that  laborers  in  fact  are  not  paid  from  what  they 
produce,  but  from  that  capital  which,  in  Jevons's  own  lan- 
guage, serves  to  sustain  them  through  the  period  over 
which  their  exertions  are  spread.  Evidently  Jevons  had 
in  mind,  in  this  sally  on  the  wages  fund,  the  case  of  indi- 
vidual laborers  and  their  immediate  employers,  and  the 
determination  of  money  wages  by  the  money  value  or  ex- 
change value  of  the  product.  He  thought  of  the  doctrine 
as  referring  solely  to  these  proximate  relations  between 
capitalists  and  laborers.  It  has  been  sufficiently  shown 
how  much  warrant  he  had,  in  the  writings  of  the  economists 
who  had  set  it  forth,  for  this  conception  of  its  scope.  His 
general  reaction — certainly  a  healthy  one — from  what  he 

anticipated  profits,  and  the  competition  to  obtain  proper  workmen  will 
strongly  tend  to  secure  to  the  latter  all  their  legitimate  share  in  the  ulti- 
mate produce."  In  the  early  stages  of  a  new  industry  (Atlantic  cables 
are  instanced),  much  will  be  paid  in  wages,  if  capitalists  make  a  large  es- 
timate of  probable  profits.  "  At  this  point  it  is  the  wage  fund  theory 
that  is  in  operation.  .  .  .  The  wage  fund  theory  acts  in  a  wholly  tempo- 
rary manner.  Every  labourer  ultimately  receives  the  due  value  of  his 
produce  after  paying  a  proper  fraction  to  the  capitalist  for  the  remunera- 
tion of  abstinence  and  risk."  The  question  at  once  suggests  itself,  is 
not  capital  as  much  needed  when  wages  are  normal  as  when  they  are  ab- 
normal, to  perform  the  function  of  sustaining  labor? 


308  WAGES  AND   CAPITAL. 

called  "  the  maze  of  the  Ricardian  economics  "  disposed 
him  to  fling  aside  once  for  all  a  mechanical  doctrine  such 
as,  in  the  current  and  authoritative  versions,  the  wages 
fund  theory  was.  On  this  topic,  as  on  others,  his  impa- 
tience with  the  self-satisfied  English  political  economy  of 
his  day  led  him  to  flat  denial  rather  than  to  careful  sift- 
ing of  the  true  from  the  false.  At  all  events,  he  con- 
tributed less  than  might  have  been  expected,  in  view  of 
his  own  conclusions  as  to  capital,  to  the  satisfactory  state- 
ment of  the  relation  of  capital  to  the  present  reward  of 
laborers. 

Thus  neither  Gossen  nor  Jevons,  who  were  the  most 
important  forerunners  of  the  new  mode  of  approaching 
economic  theory,  linked  together  the  two  chains  of  thought 
which  were  to  lead  to  a  fresh  consideration  of  the  theory 
of  wages.  Gossen  pointed  out  that  incomplete  commodi- 
ties derive  their  utility  from  those  complete  and  enjoyable. 
Jevons,  while  following  Gossen  in  the  theory  of  final 
utility,  and  taking  another  forward  step  in  the  emphasis 
he  laid  on  the  element  of  time  in  its  connection  with 
capital,  gave  no  attention  to  the  relation  between  inchoate 
wealth  and  consumable  commodities.* 

The  gap  between  the  two  lines  of  thought  was  soon 
closed.  In  1871,  the  same  year  in  which  Jevons  pub- 
lished the  first  edition  of  his  Theory,  Professor  Carl 
Menger  published  his  Grundsatze  der  Volkswirthschaftslehre, 
which  contains,  more  or  less  explicitly,  the  characteristic 

*  In  any  attempt  to  trace  the  general  development  of  the  new  theory 
of  value,  it  would  be  necessary  to  refer  to  the  contributions  of  Leon 
\Valras.  But  I  have  found  nothing  in  either  edition  of  Walras's  Ett- 
ments  d'ficonomie  Politiqtie  Pure  which  bears  on  the  present  inquiry. 
There  is  some  brief  mention  of  the  wages  fund  doctrine  (see  Legon 
32  in  the  second  edition,  pp.  359-364),  but  it  is  directed  mainly  to 
Mill's  simple  statement  in  the  Political  Economy,  which  Walras,  like 
Cairnes,  finds  to  be  only  a  statement  of  the  problem,  and  no  solution. 


CONTEMPORARY   DISCUSSION.  309 

doctrines  of  the  Austrian  school,  and  is  rightly  regarded 
by  its  members  as  the  main  source  of  their  inspiration". 
With  every  allowance  for  the  suggestions  contained  in  the 
works  of  previous  writers,  such  as  Gossen,  Walras,  and 
Jevons,  it  must  be  admitted  to  be  an  original  and  power- 
ful book.  How  far  the  general  doctrines  set  forth  in  it 
will  prove  a  complete  substitute  for  the  older  views,  how 
far  will  serve  only  to  correct  and  qualify  them,  remains 
still  to  be  seen.  For  our  subject,  however,  the  situation 
is  comparatively  simple  :  and  what  Menger  contributed 
toward  its  elucidation  can  be  stated  in  brief  terms. 

At  the  outset  Menger  distinguishes  between  different 
classes  of  goods.  Things  consumable  and  enjoyable  are 
"  Giiter  erster  Ordnung,"  as  bread;  those  not  quite  in 
the  stage  of  enjoyment  are  of  the  second  order,  as  flour, 
fuel,  stoves;  those  of  the  third  order  are  still  farther 
removed  from  enjoyment,  as  grain  and  flour  mills;  and  so 
on.  He  adds  that  the  precise  classification  of  goods,  as 
being  in  the  first,  second,  or  third  order,  is  not  essential. 
The  lines  of  demarcation  can  not  be  rigidly  drawn  ;  the 
classification  is  no  more  than  an  aid  for  the  clearer  ex- 
planation of  a  difficult  subject.  Thereafter  he  speaks,  as 
a  rule,  simply  of  goods  of  lower  order  or  of  higher  order: 
those  of  lower  order  being  nearer  the  stage  of  comple- 
tion and  enjoyment,  those  of  higher  order  more  remote 
from  it.* 

The  next  step  is  in  a  direction  already  pointed  out  by 

*  Grtmdsatze  det  Volkswirthschaftslekre,  ch.  i,  §  2.  It  should  be 
mentioned  that  Menger  includes  among  goods  of  higher  or  lower  order 
the  kinds  of  labor  appropriate  or  trained  for  the  use  of  the  several  classes 
of  goods  :  the  miller's  labor  being  classed  with  the  mill,  the  baker's  labor 
with  the  bread.  I  have  never  been  convinced  that  it  is  expedient  thus 
to  fit  human  labor  into  the  same  scheme  of  value  as  the  product  which  it 
makes :  the  attempt  to  do  so  being  the  result  of  an  unnecessary  striving 
after  formula;  of  universal  application. 


3io 


WAGES  AND   CAPITAL. 


Gossen  :  the  value  of  goods  of  higher  order  is  dependent 
on  that  of  the  goods  of  lower  order  which  they  serve  to 
make. 

Then  comes  the  step  important  for  the  present  discus- 
sion. Time  must  elapse  before  goods  of  higher  order  can 
be  converted  into  goods  of  lower  order.  Menger  criticizes 
Adam  Smith  for  having  ascribed  the  progress  of  the  arts 
and  the  growth  of  wealth  to  the  division  of  labor  alone. 
The  great  cause  of  material  progress  he  finds  in  the  de- 
velopment of  an  extended  chain  of  labor,  by  which  enjoy- 
ment, instead  being  secured  without  delay,  is  the  result  of 
the  orderly  and  progressive  advance  of  goods  of  higher 
order  to  the  later  stage  of  consumption  and  enjoyment. 
Whether  or  no  this  criticism  of  Adam  Smith  is  entirely 
just  (Menger  himself  notes  incidentally  that  an  "  ap- 
propriate division  of  labor  "  must  concur  to  make  effec- 
tive the  process  described  by  him),  the  passage  gives  due 
emphasis  to  what  we  have  called  the  successive  division 
of  labor,  and  so  to  the  true  relation  between  present  work 
and  present  exertion.*  Later  this  whole  train  of  thought 
is  still  more  fully  developed.  The  succession  of  stages 
in  production  is  sketched  :  first,  the  present,  when  goods 
of  the  first  order  are  on  hand  and  available  ;  then  a  second 
period,  during  which  goods  of  the  second  order  can  be 
advanced  to  the  stage  of  completion  ;  and  so  on.  The 
conception  of  a  general  production  period  is  also  defined, 
— of  the  average  length  of  time  elapsing  between  the  be- 
ginning and  the  end  of  the  whole  series  of  laborious  acts 
by  which  the  present  supply  of  enjoyable  commodities  has 
been  produced.  Chiefly  concerned,  as  he  is,  with  the 
value  of  inchoate  goods  as  derived  from  that  of  fin- 
ished commodities,  Menger  does  not  enlarge  on  the 
element  of  time  and  the  extension  of  the  production 

*  Griindsatze,  ch.  i,  §§  4,  5. 


CONTEMPORARY   DISCUSSION. 


3*1 


period ;  but  the  essential  truths  are  none  the  less  clearly 
set  forth.* 

On  capital  Menger  does  not  seem  to  have  fully  matured 
his  thought,  and  certainly  had  not  fully  settled  his  choice 
of  phraseology.  It  is  said  that  the  function  of  capital  is 
to  provide  for  present  needs,  and  to  make  possible  the 
devotion  of  present  labor  to  the  satisfaction  of  future 
needs  ;  and  that  "  capital  "  should  refer  to  the  stores  of 
goods  available  for  the  use  of  the  present  and  the  future, 
enabling  mankind  to  secure  the  gain  which  accrues  from 
an  extension  of  the  period  of  production.  This  would  in- 
dicate that  the  line  of  thought  suggested  by  Jevons  was 
uppermost  in  his  mind.  We  are  told  explicitly  that  the 
division  of  goods  into  those  of  higher  order  and  of  lower 
order  does  not  coincide  with  the  division  between  capital 
and  not  capital. f  Many  years  later,  Menger  expressed 
himself  again  on  the  meaning  of  capital,  but  again  with 
very  brief  statement  of  his  own  views;  intimating  only 
that  the  true  conception  was  to  be  found  rather  by  the 
analysis  of  the  various  ways  in  which  property  was  made 
to  yield  income,  than  by  a  consideration  of  the  intrinsic 
uses  of  economic  goods. \  Whether  or  no  his  views  on 

*  Gnmdsdtze,  ch.  ii,  §  i,  c ;  ch.  iii,  §  3.  Menger  not  only  points  out 
in  general  that  "  Vorsorge,"  or  planning  for  the  future,  distinguishes  the 
activity  of  civilized  man,  but,  in  a  note  at  p.  136,  remarks  that  the  longer 
the  period  over  which  the  acts  of  production  are  spread,  the  greater  the 
final  productivity.  This,  however,  is  but  briefly  intimated  ;  it  remained 
for  his  successor,  Professor  Bohm-Bawerk,  to  develop  the  thought. 

f  See  the  extended  footnote  in  Monger's  GnmJsdtze,  pp.  130-131. 

Jinan  article  "  Zur  Theorie  des  Kapitals  "  in  the  Jahrbiicher  fur 
National-oekonomie,  Neue  Folge,  vol.  xvii,  pp.  1-49  (1888).  The  article 
undertakes  a  critical  review  of  the  various  conceptions  and  definitions  of 
capital  ;  repeats  what  was  said  in  the  Grundsdtze,  that  the  distinction 
between  capital  and  other  wealth  is  not  the  same  as  the  distinction  be- 
tween inchoate  and  enjoyable  wealth  ;  and  suggests  that  the  way  to  a 
solution  of  the  question  is  by  considering  "  das  werbende  Vermogen  iiber- 


312 


WAGES   AND   CAPITAL. 


this  part  of  theory,  if  developed  in  detail,  would  have 
much  affected  the  trend  of  thought,  must  be  uncertain. 
The  question  proximately  is  one  of  phraseology,  and  so 
far  not  essential.  On  the  crucial  question  of  the  relation 
in  time  between  inchoate  wealth  and  consumable  commod- 
ities, Menger  set  forth  clearly  the  important  truths. 

Finally,  this  phase  of  economic  theory  received  its 
fuller  development  at  the  hands  of  a  disciple  of  the  Aus- 
trian school  who  may  be  fairly  ranked  with  the  leader. 
In  1888  Professor  Bohm-Bawerk  published  the  Positive 
Theory  of  Capital*  Here  again,  however  unmistakable 
and  considerable  may  be  the  indebtedness  to  previous 
writers,  we  have  the  marks  of  vigorous  independent 
thought ;  combined,  moreover,  with  a  skill  in  exposition 
not  found  in  the  leader  of  the  school,  and  conducing  not 
a  little  to  the  powerful  impression  which  the  volume  made 
on  economists  the  world  over. 

Much  of  the  analysis  of  industrial  operations  which  is 
contained  in  the  Positive  Theory  of  Capital  has  been  ac- 
cepted in  the  first  part  of  the  present  essay  ;  and  it  will 
therefore  not  be  necessary  to  give  so  full  an  account  as 
would  otherwise  be  called  for.  On  the  other  hand,  we  are 
not  concerned  with  the  refinements  of  the  theory  of  in- 
terest which  it  aims  to  establish.  That  theory  must  indeed 
have  a  bearing,  on  the  causes  that  determine  wages  in  the 
end,  and  on  the  final  outcome  of  distribution.  The  essen- 
tial truths  which  it  involves  can  be  stated  in  much  simpler 
terms  than  its  author  thought  well  to  use;  and  so  stated, 
would  probably  be  found  to  involve  a  less  radical  depart- 

haupt,"  and  the  "  Ertragserscheinungen  jcder  einzelnen  Katcgoric  dcs 
\vcrbenden  Vermogens  in  ihrer  Eigenart."  This  points  to  a  different 
sort  of  inquiry  and  conclusion  from  that  followed  in  Bohm-Bawerk's 
Positive  Theory  of  Capital,  which  was  in  press  when  Monger's  article 
appeared. 

*  The  English  translation  appeared  in  iSgi. 


CONTEMPORARY   DISCUSSION. 


313 


ure  from  familiar  ideas  than  we  are  told  to  expect.  But 
as  far  as  the  immediate  relations  between  capital  and 
labor  are  concerned,  it  is  not  necessary  to  follow  the 
ramifications  of  the  reasoning  by  which  the  exchange  of 
present  goods  for  future  is  explained.  The  mode  in 
which  the  particular  subject  of  the  present  inquiry  has 
been  dealt  with  by  this  brilliant  writer  is  comparatively 
simple,  and  can  be  described  in  brief  terms. 

The  relation  between  present  labor  and  present  prod- 
uct ;  the  successive  stages  in  production ;  the  yield  of 
consumable  commodities  as  the  outcome  of  a  lengthened 
series  of  exertions, — all  is  set  forth  methodically  and  in 
detail,  in  such  manner  as  to  make  this  part  of  economic 
theory  henceforth  an  established  and  unquestioned  pos- 
session of  the  science.  The  increase  in  the  productive- 
ness of  labor  with  the  advance  in  the  arts  of  civilization 
is  indeed  linked  perhaps  too  closely  with  the  lengthening 
in  time  of  the  general  process  of  production.  We  are 
told  that,  as  a  fact  of  experience,  the  greater  the  length 
of  the  period  of  production,  the  greater  the  final  outcome 
in  consumable  commodities  ;  while  yet  each  prolongation 
of  the  period  brings  a  less  increment  of  commodities  than 
that  which  preceded.  This  supposed  close  and  regular 
connection  between  the  period  of  production  and  the  final 
yield  of  enjoyable  wealth  becomes  later  an  essential  pos- 
tulate of  the  theory  of  interest :  it  being  assumed  that  the 
extension  of  the  period  of  production  will  always  increase 
the  final  output,  yet  always  increase  it  in  diminishing 
ratio.  It  has  been  elsewhere  intimated  that  we  have  here 
an  unduly  rigid  version  of  the  direction  which  is  likely  to 
be  followed  by  progress  and  invention.*  But  so  far  as 
the  relation  of  present  labor  to  its  product  is  concerned, 
it  is  not  material  whether  we  admit  unreservedly,  or  qual- 

*  See  Part  I,  Chapter  I,  pp.  9-10. 


WAGES   AND   CAPITAL. 

ify  carefully,  the  proposition  that  the  longer  the  time 
over  which  labor  is  spread,  the  greater  will  surely  be  the 
final  yield.  It  suffices  to  have  it  established  once  for  all 
that  in  civilized  industry  there  is  always  the  long  interval 
between  labor  and  fruition. 

Next,  capital  is  defined  as  the  "  future  goods  "  of  the 
community, — as  the  wealth  not  yet  available  for  con- 
sumption. This  is  the  community's  real  capital;  whereas 
its  real  income  consists  of  the  utilities  derived  from  com- 
pleted consumable  things.  Whether  or  no  the  definition 
so  chosen  be  found  acceptable  —  and  to  the  present 
writer,  as  has  already  appeared,  it  seems  in  its  central 
idea  convenient  and  consistent* — it  has  the  merit  once 
again  of  bringing  into  clear  light  the  real  course  of  pro- 
duction in  modern  communities,  and  of  getting  rid  of  the 
difficulties  which  arise  from  considering  capital  in  its  rela- 
tions to  money  wealth  or  to  individual  income. 

Last  among  Bohm-Bawerk's  contributions  to  the  ques- 
tions closely  connected  with  the  wages  fund  doctrine, 
we  have  the  conception  of  the  general  subsistence  fund. 
The  total  possessions  of  the  community  are  reduced  to  a 
common  basis  by  the  description  of  all  wealth  as  available 

*  I  say,  in  its  central  idea  ;  because  there  is  a  difference  between 
Bohm-Bawerk's  definition  and  that  adopted  in  the  first  part  of  this  vol- 
ume (see  Part  I,  Chapter  II).  Those  enjoyable  commodities  which,  like 
dwelling  houses,  are  durable  sources  of  direct  satisfaction,  are  considered 
by  Bohm-Bawerk  to  be  capital,  in  so  far  as  the  utilities  which  they  yield 
are  available  in  the  future.  They  are  partly  present  goods,  but  partly 
future  goods.  To  my  mind,  they,  or  the  utilities  they  yield,  are  simply 
income,  in  so  far  as  no  further  exertion  is  needed  to  bring  them  to  the 
enjoying  person.  Consistently  with  his  reasoning,  Bohm-Bawerk  main- 
tains that  these  "  future  goods  "  yield  interest  precisely  as  other  future 
goods,  such  as  machines  and  materials,  yield  it.  This  seems  to  me  doubt- 
ful, if  there  were  no  other  "  capital"  than  durable  sources  of  immedi- 
ate satisfaction,  the  phenomenon  of  interest  as  we  have  it  in  the  modern 
world  would  probably  not  emerge. 


CONTEMPORARY   DISCUSSION. 


315 


sooner  or  later  for  enjoyment  or  subsistence.  Omitting 
the  land  and  other  natural  agents,  all  goods,  whether  now 
enjoyable  or  not,  are  conceived  as  serving  in  due  time  to 
satisfy  wants.  The  machine  ripens  into  the  consumable 
commodities  which,  so  long  as  it  lasts,  it  helps  to  produce  : 
some  of  the  utilities  it  yields  are  thus  available  at  an  early 
date,  some  not  till  the  distant  period  when  it  is  finally  on 
the  point  of  being  thrown  away  as  old  metal.  Materials 
reach  the  stage  of  fruition  more  quickly  and  evenly. 
Goods  whose  more  obvious  physical  manipulation  has 
ceased,  and  which  are  awaiting  purchase  in  dealers'  hands, 
are  nearly  ready  and  available.  All,  however,  are  alike 
as  containing  more  or  less  ripened  utilities,  and  serving 
to  provide  for  the  wants  of  the  community  over  a  longer 
or  shorter  space  in  the  future.  They  thus  constitute  in 
the  aggregate  one  indistinguishable  subsistence  fund  on 
which  the  community  draws  for  the  present  and  future; 
while  present  labor  can  do  no  more  than  advance  com- 
modities in  their  due  order  through  the  successive  steps  in 
production. 

This  is  not  an  entirely  novel  conception.  Indeed,  its 
author  does  not  present  it  as  such.  He  remarks  that  it 
has  some  resemblance  to  the  old  theory  of  the  wages  fund. 
Like  that,  it  emphasizes  the  stock  of  wealth  already  pro- 
duced as  the  source  whence  laborers  are  maintained  and 
rewarded;  though  with  a  clearer  conception  of  the  nature 
and  function  of  capital  than  had  been  reached  by  any  of 
the  older  writers.  It  is  clearly  unlike  the  old  view,  in 
that  it  has  regard  to  the  whole  period  of  production,  and 
not  to  any  one  season.*  On  the  other  hand,  it  has  more 

*  In  noting  the  points  of  resemblance  and  difference  between  his  o\vn 
theory  and  that  of  the  wages  fund,  Bohm-Bawerk  summarizes  the  latter 
after  the  manner  of  Jevons  and  Cairnes  :  as  containing  simply  the  truism 
that  wages  depend  on  the  ratio  between  the  number  of  laborers  and  the 
amount  paid  them  in  wages.  Positive  Theory,  Book  VII,  ch.  v,  p.  419. 


WAGES   AND   CAPITAL. 

than  a  family  resemblance  to  Ricardo's  analysis  of  capi- 
tal as  a  succession  of  advances  to  laborers, — a  resem- 
blance to  which  the  author  does  not  call  attention,  but 
which  is  none  the  less  clear.  It  thus  proceeds,  in  some 
part,  on  old  lines;  with  yet  a  mode  of  statement  of  its 
own,  and  certainly  an  important  advance  in  the  under- 
standing of  the  complex  course  of  industrial  operations. 

The  application  of  this  conception  to  the  theory  of 
wages  is  not  fully  worked  out,  and  criticism  and  comment 
must  therefore  be  tentative.  So  far  as  its  application  to 
wages  as  a  separate  item  in  distribution  is  concerned, 
there  is  an  obvious  difficulty  in  the  fact  that  the  general 
subsistence  contains  the  income  not  only  of  laborers,  but 
of  the  whole  community.  So  much  is  expressly  pointed 
out  by  the  author  himself.  It  is  true  that  this  difficulty 
is  sought  to  be  avoided  ;  but  not  with  signal  success.  The 
fund  is  assumed  at  first,  for  the  purposes  of  abstract  rea- 
soning, to  yield  advances  to  laborers  alone.  We  are 
promised  at  a  later  stage  an  exposition  of  the  manner  in 
which  other  shares  of  distribution  will  then  emerge.*  But 
that  exposition  is  never  fully  carried  out  with  regard  to 
the  subsistence  fund.  What  we  find,  is  that  analysis  of 
the  exchange  of  present  goods  for  future,  and  of  the  con- 
sequent emergence  of  interest  as  the  inevitable  result, 
which  had  already  been  set  forth  in  essentials  even  before 
the  discussion  of  the  subsistence  fund  was  reached.  The 
causes  which  determine  interest  can  probably  be  stated  in 
simpler  terms  than  we  find  in  the  elaborate  analysis  of  the 
superiority  of  present  goods  over  future,  and  the  equally 

The  off-hand  manner  in  which  the  doctrine  was  often  stated  by  its  up- 
holders, may  give  fair  ground  for  such  a  version  ;  but,  as  we  have  seen, 
there  was  more  than  this  in  it,  and  a  more  substantial  resemblance  to  the 
doctrine  of  the  Positive  Theory  than  Bohm-Bawerk  would  imply. 

*  Positive  Theory,  Book  VI,  ch,  v,  especially  the  footnote  at  p.  320  ; 
and  Book  VII,  ch.  v. 


CONTEMPORARY   DISCUSSION. 


317 


elaborate  attempts  to  apply  to  them  the  psychological 
theory  of  value.  In  any  case,  these  refinements  go  but 
a  very  little  way  toward  explaining  just  how  the  total 
subsistence  fund  and  its  ripening  instalments  are  diverted 
to  one  and  another  class  in  the  community.  No  doubt, 
for  the  explanation  of  the  fundamental  forces  which  shape 
distribution,  a  sound  theory  of  interest  is  essential.  This, 
however,  even  supposing^  it  to  have  been  reached  by  our 
author,  does  not  suffice  for  the  purposes  of  that  investiga- 
tion of  the  machinery  of  distribution  which  is  the  essen- 
tial part  of  the  wages  fund  problem. 

But,  to  repeat,  the  conception  of  the  subsistence  fund 
is  advanced  briefly  by  Bohm-Bawerk,  and  its  application  to 
the  direct  questions  of  wages  is  avowedly  not  completed. 
Criticism  is  therefore  both  difficult  and  likely  to  be  unjust. 
No  attempt  is  made  to  consider  the  concrete  mode  in 
which  the  fund  reaches  laborers.  Still  less  is  any  attempt 
made  to  consider  separately  the  special  case  the  great  and 
preponderating  class  of  hired  laborers,  and  the  dealings 
with  them  on  the  one  hand,  and  with  the  idle  investor  on 
the  other  hand,  of  the  active  manager  of  industry.  Such  a 
more  detailed  and  concrete  examination  of  the  machinery 
of  distribution  is  an  essential  part  of  the  discussion  of  the 
wages  fund  question  and  all  that  hangs  thereby. 

We  must  be  content,  therefore,  to  accept  as  it  stands 
the  contribution  which  Bohm-Bawerk  has  made  to  the 
general  position  of  the  laborer  in  relation  to  past  and 
present  product.  So  far  as  he  goes  in  his  treatment  of 
the  relation  in  which  the  real  reward  of  laborers  stands  to 
the  capital  and  the  total  possessions  of  the  community,  it 
would  be  difficult  to  find  a  flaw  in  the  analysis.  The 
marshalling  of  the  possessions  of  the  social  body  ;  the 
mode  in  which  these  constitute  a  stock  available  for 
the  needs  of  the  present  and  the  nearer  future  ;  the  ad- 
vance of  present  supplies  to  laborers  who  produce  for 


318  WAGES   AND   CAPITAL. 

future  needs;  the  diversion  of  part  of  the  inflowing  real 
income  to  other  classes  than  laborers;  the  determination 
of  the  share  that  goes  to  laborers  by  the  play  of  motives 
among  those  who  own  the  existing  stock, — on  these  topics 
economic  theory  will  gain  by  following  the  main  trend  of 
the  exposition  which  has  finally  resulted  from  the  labors 
of  the  Austrian  school.  It  is  not  all  new  ;  but  it  is  freshly 
and  luminously  stated ;  and  it  is  deserving  of  all  praise. 


CHAPTER   XV. 

GENERAL    SUMMARY. 

THE  results  of  the  prolonged  inquiry  may  now  be 
summed  up :  both  the  positive  conclusions  reached  in  the 
first  part  of  the  volume,  and  the  outcome  of  the  historical 
and  critical  chapters  of  the  second  part. 

We  began,  in  the  first  chapter,  with  the  proposition  that 
all  laborers,  and  all  the  members,  of  any  community  in 
which  the  successive  division  of  labor  has  been  developed 
far,  are  supported  chiefly  by  the  product  of  past  labor. 
When  once  attention  is  fastened  on  real  wages,  the  enjoy- 
able and  consumable  commodities  which  satisfy  human 
wants  ;  and  when  the  mode  in  which  production  is  carried 
on  in  any  but  the  most  primitive  communities  is  con- 
sidered,— it  becomes  clear  that  present  labor  does  not 
produce  present  real  income. 

Whether  labor  is  to  be  regarded  as  paid  from  capital 
or  not,  depends  on  what  is  meant  by  the  term  capital. 
The  most  consistent  and  significant  meaning  of  that  term 
is,  wealth  not  yet  in  enjoyable  shape.  In  this  sense,  labor 
clearly  is  not  paid  from  capital  :  for  by  definition  things 
yielding  satisfaction  or  constituting  real  income  are  not 
capital.  But  real  income  is  constantly  emerging  from 
capital.  Labor  is  steadily  putting  the  finishing  touches 
to  wealth  not  yet  in  enjoyable  form,  and  so  advancing  it 
to  the  stage  where  it  becomes  a  source  of  real  wages  as 
well  as  of  real  interest  and  real  rent.  Considering  any 

22  319 


320  WAGES   AND   CAPITAL. 

but  the  shortest  period  in  production,  the  resources  from 
which  the  community  must  look  for  support  and  enjoy- 
ment exist  at  any  one  time  mainly  in  the  form  of  capital, 
not  in  the  form  of  enjoyable  wealth.  Income  now  earned 
or  now  acquired  has  its  real  source  in  the  continuous  flow 
of  consumable  commodities  which  is  steadily  emerging 
from  the  capital  of  the  community.  Such  was  the  result 
of  the  second  chapter. 

The  third  chapter  considered  the  special  case  of  hired 
laborers,  and  the  relation  between  the  capitalist  employer 
and  his  workmen.  If  all  laborers  were  independent, — if 
all  were  owners  or  tenants  of  land,  or  artisans  carrying  on 
production  at  their  own  risk  and  charge, — no  ground 
would  exist  for  saying  that  their  share  of  enjoyable  wealth 
and  real  income  came  from  the  available  total  by  a  pro- 
cess differing  in  essentials  from  the  process  by  which 
others  secured  their  income.  But  in  fact,  in  most  modern 
communities,  a  very  large  number,  often  the  larger  num- 
ber, among  those  who  earn  their  living  by  manual  labor 
are  not  in  this  independent  situation.  They  are  de- 
pendent, for  their  share  of  real  income,  on  being  hired  by 
some  one  else.  With  the  advantages  or  disadvantages  of 
this  situation  our  inquiry  is  not  concerned.  As  the  in- 
dustrial situation  stands,  ownership  of  wealth  is  in  fact 
unequally  divided;  the  greater  part  of  the  capital  and 
of  the  steadily  accruing  wealth  of  the  community  is 
owned  by  a  comparatively  small  number  of  active  capi- 
talists;  and  the  money  rights  derived  from  the  sale  of 
the  endless  variety  of  marketable  commodities  flow  first 
into  their  hands.  Hired  laborers  are  dependent  for  their 
money  income,  and  therefore  for  their  share  of  real  in- 
come, on  a  bargain  with  those  owners  of  capital.  The 
body  with  whom  hired  laborers  deal  directly,  consists  of 
their  immediate  employers  only;  but  the  body  whose 
dealings  are  reallv  decisive  as  to  the  extent  to  which 


GENERAL    SUMMARY. 


321 


laborers  shall  be  hired,  is  much  larger.  It  includes  the 
middlemen,  merchants,  bankers,  who  form  so  influential  a 
contingent  in  the  ranks  of  the  active  managers  of  in- 
dustry. In  a  larger  sense,  and  in  the  long  run,  it  may  be 
said  to  include  also  the  idle  investor,  who  invests  his 
money  means, — his  claim  on  the  community's  possessions, 
— by  putting  them  in  the  hands  of  the  managing  class, 
and  who  gets  from  that  class  a  stipulated  income.  At  all 
events,  hired  laborers  are  dependent  on  a  wages  fund  (if 
one  chooses  so  to  call  it)  which  is  in  the  hands  of  the  capi- 
talist class.  Their  money  income  is  derived  from  what 
the  capitalists  find  it  profitable  to  turn  over  to  them. 

This  is  a  wages  fund  doctrine,  and  a  conclusion  as  to 
the  relation  of  capital  to  wages,  quite  different  from  that 
reached  in  the  first  two  chapters.  It  bears  not  on  the 
permanent  and  unalterable  relation  of  real  capital  to  real 
wages,  but  on  the  relations  of  certain  kinds  of  laborers  to 
the  capitalists  of  our  modern  communities.  It  would  not 
be  applicable  to  a  society  in  which  all  workmen  were  in- 
dependent producers,  or  in  which  the  centralized  admin- 
istration of  production  was  secured  by  cooperative  meth- 
ods ;  still  less  in  a  society  organized  on  a  collectivist  or 
socialist  basis.  It  explains  some  of  the  phenomena  of 
modern  advanced  communities,  and  applies  to  them  the 
more,  in  proportion  as  the  regime  of  employing  capitalists 
and  hired  laborers  is  the  more  fully  developed. 

The  remaining  chapters  of  the  first  part  gave  some  fur- 
ther applications  and  illustrations  of  the  main  conclusions 
reached  in  the  first  three.  On  the  one  hand,  the  much- 
debated  question  as  to  the  elasticity  of  the  proximate 
source  of  wages  was  examined  in  its  double  aspect, — as  to 
the  source  of  the  real  wages  of  all  laborers,  and  as  to  the 
sources  of  the  money  wages  which  hired  laborers  get 
from  employers.  In  either  case,  there  were  found  to  be 
wages  funds  which  were  roughly  predetermined,  yet  were 


322 


WAGES  AND   CAPITAL. 


so  elastic,  and  elastic  within  such  considerable  limits,  that 
the  predetermination  served  chiefly  to  illustrate  the  nature 
of  the  reasoning  applicable  to  questions  of  general  wages, 
and  could  not  give  guidance  as  to  any  concrete  difficul- 
ties or  practical  problems. 

In  the  concluding  chapter  of  the  first  part,  it  was  then 
pointed  out  that,  in  its  relations  to  other  economic  ques- 
tions, whether  practical  or  theoretical,  the  whole  wages 
fund  controversy  was  of  comparatively  little  significance. 
Practical  questions, — on  strikes,  trade  unions,  combina- 
tions,— invariably  arise  as  to  particular  wages,  not  as  to 
wages  at  large  ;  while  it  is  only  to  the  questions  of  wages 
at  large  that  general  reasoning  as  to  wages  and  capital  can 
apply.  So  far  as  the  deeper  problems  of  distribution  are 
concerned,  it  appeared  again  that  these  have  little  to  do 
with  the  general  wages  fund.  More  particularly,  the 
residual  theory  of  wages,  which  has  been  much  asso- 
ciated with  attacks  on  the  old  wages  fund  doctrine,  has 
no  real  connection  with  the  questions  as  to  the  sources 
either  of  real  wages  or  of  any  other  sort  of  real  income. 
In  fact,  the  wages  fund  doctrine,  or  what  there  is  of  truth 
in  it,  has  to  do  rather  with  production  than  with  distribu- 
tion. It  serves  to  describe  the  process  by  which  the  real 
income  of  the  community  emerges  from  a  prolonged  pro- 
cess of  production  ;  and  it  serves  to  describe  in  what 
manner  the  hired  laborers  of  advanced  industrial  commu- 
nities get  their  share  of  this  accruing  real  income.  It 
thus  describes  important  parts  of  the  machinery  of  pro- 
duction and  of  distribution.  But  it  can  tell  us  little  as  to 
the  forces  which  move  that  machinery, — as  to  funda- 
mental causes  which  make  the  real  income  of  the  com- 
munity large  or  small,  or  which  determine  the  share  of 
that  real  income  which  in  the  long  run  shall  go  to  wages 
or  interest  or  rent.  Its  truth  has  been  misconceived,  its 
importance  exaggerated. 


GENERAL   SUMMARY. 


323 


In  the  critical  and  historical  chapters  of  the  second 
part,  the  long  and  often  wearisome  controversy  has  been 
followed  from  Adam  Smith  to  the  present  time.  For  near 
a  century,  indeed,  there  was  little  in  the  way  of  contro- 
versy. Adam  Smith  pointed  out  that,  with  the  division  of 
labor,  the  relation  between  productive  exertion  and  its 
enjoyable  result  becomes  indirect,  and  prolonged  in  time  ; 
and  he  laid  it  down  that  wages  are  therefore  paid  from 
capital.  In  this  very  first  stage  of  the  discussion  the  con- 
fusion appeared  between  money  wages  and  real  wages — 
between  the  payment  of  the  hired  laborer  from  the  money 
resources  of  the  employers,  and  the  derivation  of  real  in- 
come from  social  capital.  Adam  Smith  explained  at  length 
that  money  was  but  "the  wheel  of  circulation,"  and  that 
the  true  source  of  all  income  was  consumable  goods ;  but 
he  failed  to  examine  what  was  the  relation  of  consumable 
goods  to  capital. 

His  successors  did  not  go  farther.  For  one  reason  and 
another,  they  failed  to  do  more  than  repeat  the  vague  and 
general  proposition  that  wages  depended  on  capital.  The 
main  cause  of  this  unsatisfactory  treatment  was  the  em- 
phasis which,  after  Malthus  and  Ricardo  had  made  their  in- 
fluence felt,  was  given  to  "  natural  "  wages,  to  the  standard 
of  living,  and  to  the  principle  of  population.  This  caused 
questions  as  to  "  market  "  wages  to  be  dismissed  with  brief 
mention,  and  so  to  receive  no  more  careful  examination 
than  had  been  given  this  topic  by  Adam  Smith.  The  for- 
mula that  wages  depended  on  the  ratio  between  capital  and 
population  was  handed  on  from  writer  to  writer  with  no 
important  variation  and  no  real  development,  throughout 
the  period  of  the  ascendency  of  the  English  school. 

The  unsatisfactory  and  ambiguous  character  of  the 
accepted  formula  is  clearly  shown  by  the  mode  in  which 
it  was  applied  at  the  hands  of  John  Stuart  Mill.  By  this 
authoritative  writer  the  lengthened  period  of  production 


324 


WAGES   AND   CAPITAL. 


is  referred  to  in  the  briefest  terms,  and  the  dependence  of 
labor  on  "capital"  in  the  sense  of  real  capital  is  rather 
implied  than  expressed.  On  the  other  hand,  "  capital  "  in 
relation  to  wages  is  usually  described  as  funds,  sums, 
money  resources,  and  spoken  of  as  if  it  were  all  in  the 
hands  of  the  direct  employer.  The  latter  meaning  was 
fastened  on  by  the  critics  who  first  began  to  question  the 
soundness  of  the  traditional  view.  Longe  and  Thornton 
began  to  ask  whether  the  funds  which  employers  could 
turn  over  to  laborers  were  predetermined,  and  so  were 
led  to  deny  the  rigidity  of  the  wages  fund.  Cairnes  tried 
to  answer  them  ;  but,  while  continuing  to  speak  chiefly  of 
employers'  resources  and  money  funds,  he  never  fully  faced 
the  question  whether  those  funds  were  or  were  not  prede- 
termined. In  the  end,  this  almost  exclusive  attention  to 
employers'  funds  and  laborers'  money  wages,  led  to  a  de- 
nial not  only  of  the  rigidity  of  the  wages  fund,  but  of  the 
payment  of  wages  out  of  any  fund  of  capital  at  all.  It 
was  maintained  that  wages  were  paid  from  current  pro- 
duct, not  from  capital. 

In  the  closing  chapter  we  have  compared  this  last 
turn  in  the  wages  fund  controversy  itself  with  the 
new  mode  of  approaching  economic  theory  which  is  asso- 
ciated with  the  Austrian  school,  and  which  has  served, 
unexpectedly  and  undesignedly,  to  bring  once  more  into 
the  foreground  the  mode  in  which  real  income  emerges 
from  social  capital.  The  examination  of  these  two  cur- 
rents of  thought  has  brought  into  bold  relief  the  ques- 
tion which  underlies  the  whole  controversy.  The  two 
propositions, — the  one,  that  labor  gets  its  reward  from 
a  product  that  is  its  own,  or  at  least  is  current  product  ; 
the  other,  that  present  labor  represents  in  the  main  a 
future  result  and  gets  its  immediate  reward  from  prod- 
ucts of  the  past, — both  have  directed  attention  to  that 
relation  in  time  between  exertion  and  result,  which  had 


GENERAL   SUMMARY.  325 

been  so  lightly  passed  over  in  the  older  literature  of 
the  subject.  It  is  not  too  much  to  hope  that  on  this 
topic,  at  least,  there  may  be  substantial  agreement 
among  economists.  It  has  been  said  that  the  con- 
troversy over  the  wages  fund  is  a  barren  one  ;  and  so 
it  is,  as  an  effort  to  settle  the  causes  which  finally  de- 
termine wages  and  shape  distribution  at  large.  But  as 
a  mode  of  describing  the  methods  and  sequence  of  pro- 
duction, the  concrete  structure  of  society  in  its  economic 
aspects,  the  manner  in  which  a  prolonged  and  compli- 
cated series  of  exertions  brings  at  last  the  flow  of  real  in- 
come, the  place  which  capitalists  have  in  the  distribution 
of  income, — on  these  topics  something  can  still  be  gained 
from  the  discussion.  The  inquiry  here  undertaken  as  to 
the  true  relation  of  wages  to  capital,  and  the  summary  of 
the  historical  development  of  the  old  doctrine,  may  put 
into  truer  light  old  views  and  modern  criticisms,  and  may 
be  helpful  for  that  restatement  of  economic  doctrines  on 
which  the  present  generation  is  so  busily  engaged. 


INDEX. 

(See  also  the  Table  of  Contents.} 


Bohm-Bawerk,  on  period  of  pro- 
duction, g-io ;  on  subsistence 
fund,  21  ;  praises  Senior,  197  ; 
on  value  and  on  subsistence  fund, 
312-317  (see  Contents). 

Boisguillebert,  mentioned,  127,  131. 

Bonar,  on  M'Culloch  as  originator 
of  wages  fund  doctrine,  190,  n. 

Brentano,  on  wages  and  capital, 
274-280  (see  Contents). 

Cairnes,  limits  wages  fund  to  hired 
laborers,  77,  n.  ;  his  division  of 
capital  referred  to,  84,  n.  ;  on 
wages  fund,  256-265  (see  Con- 
tents) ;  final  conclusions  on  dis- 
tribution different  from  Ricardo's, 
263. 

Cannan,  on  history  of  conception  of 
capital,  29  ;  on  Adam  Smith,  139, 
n.  ;  on  Ricardo's  use  of  language, 
174,  n  ;  praises  Senior,  197  ;  on 
consumption  of  capital,  226. 

Cantillon,  mentioned,  127,  131. 

Chalmers,  on  wages  and  capital,  207. 

Child,  mentioned,  126. 

Colin,  conception  of  capital,  40,  n. 


327 


Contents,  referred  to,  299,  n. 

De  Quincey,  on  wages  and  capital, 
196. 

Edinburgh  Review,  referred  to,  138, 
n.  ;  212. 

Fawcett,  on  wages  and  capital,  238, 
239- 

Ganilh,  quoted,  130  ;  on  wages  and 
capital,  157. 

Gee,  mentioned,  126. 

George,  reasoning  on  capital  re- 
ferred to,  27,  n.  ;  on  wages  and 
capital,  283-289  (see  Contents). 

Gossen,  on  value  and  utility, 
302. 

Hermann,  conception  of  capital, 
39,  n.  ;  on  wages  and  capital, 
267-273  (see  Contents). 

Hume,  mentioned,  127,  131. 

Ingram,  praises  Jones,  209,  n.  ;  on 
J.  S.  Mill,  217,  n. 


328 


WAGES   AND   CAPITAL. 


Jevons,  conception  of  capital,  39, 
n. ;  suggestion  of  demand  and 
supply  in  advances  to  laborers, 
255,  n.  ;  on  general  theory  of  dis- 
tribution, 299  ;  on  theory  of  value 
and  on  wages  fund,  303-308  (see 
Contents). 

Jones,  on  wages  and  capital,  208- 
210. 

Lauderdalc,  review  of  quoted,  138, 

n. ;  on  wages  and  capital,  158. 
Locke,  on  wages,  125  ;  mentioned, 

Longe,  on  wages  and  capital,  241- 
244  ;  on  demand  and  supply,  250. 

Loria,  on  productive  and  unpro- 
ductive labor,  35,  n. 

MacLeod,  on  wages  fund,  245. 

Malthus,  on  effects  of  luxury  on  in- 
dustrial character,  144,  n.  ;  on 
wages  and  capital,  in  first  edi- 
tion of  Essay,  159  ;  indirect  effect 
on  wages  fund  discussion,  162  ; 
oscillating  advance  of  capital  and 
population,  174,  n. ;  on  wages 
and  capital,  in  the  two  editions 
of  his  Political  Economy,  203- 
207. 

Mangoldt,  on  wages  fund,  273. 

Marcet,  on  wages  and  capital,  184  ; 
shows  Adam  Smith's  influence, 
185. 

Marshall,  describes  real  income  as 
a  flow,  20  ;  suggests  terms  auxili- 
ary and  remuneratory  capital, 

37- 

M'Culloch,  general  position,  189  ; 
on  wages  and  capital,  190-194 
(see  Contents)  ;  on  combinations 


and  rigidity  of  wages  fund,  212  ; 
on  capital  and  intention,  225. 

Menger,  C.,  on  division  of  labor, 
7,  n.  ;  on  value  and  on  cycle  of 
production,  308-312  (see  Con- 
tents). 

Mildmay,  quoted  on  wages,  125. 

Mill,  J.  S.,  limits  wages  fund  to 
hired  laborers,  77,  n.  ;  on  wages 
and  capital,  Ch.  XI  (see  Con- 
tents) ;  Essays  on  Unsettled  Qttes- 
tions  discussed,  229  ;  surrender  to 
Thornton,  247  ;  on  demand  and 
supply,  249-255. 

Mill,  James,  on  wages  and  capital, 
184-186. 

Morrison,  on  wages  and  capital, 
236-238. 

Nicholson,  on  connection  between 
wages  fund  and  Malthusian  doc- 
trine, 224,  n. 

North,  mentioned,  131. 

Pantaleoni,  referred  to,  302,  n. 
Patten,  essay  on  Ricardo,  165,  n. 
Petty,  on  wages,  125. 

Quesnay,  mentioned,  127. 

Rac,  ascribes  wages  fund  doctrine 
to  M'Culloch,  190,  n. 

Ran,  on  wages  and  capital,  273. 

Ricardo,  conception  of  capital,  29  ; 
influenced  by  conception  of  natu- 
ral wages,  32  ;  general  position, 
164-168  ;  on  wages  and  capital, 
Ch.  IX  (see  Contents) ;  Essay  on 
7,<>7t'  Price  of  Corn  referred  to, 
188,  n.,  225,  264  ;  on  high  wages 
and  low  profits,  286. 


INDEX. 


329 


Roesler,  on  wages,  273,  274. 
Roscher,  on  wages  fund,  274. 

Say,  on  wages  and  capital,  156. 

Senior,  correspondence  with  Mal- 
thus  referred  to,  162  ;  on  wages 
and  capital,  197-203  (see  Con- 
tents). 

Sidgwick,  limits  wages  fund  to 
hired  laborers,  77,  n. ;  on  wages 
and  distribution,  299. 

Sismondi,  on  wages  and  capital, 
153-156. 

Smith,  Adam,  definition  of  capital, 
28  ;  general  position,  131-134  ; 
on  wages  and  capital,  Ch.  VII 
(see  Contents). 

Steuart,  mentioned,  126,  131, 


Thornton,  referred  to,  83,  n.  ;  on 
wages  fund,  246  ;  on  demand  and 
supply,  251  ;  not  answered  by 
Cairnes,  258-262. 

Torrens,  on  wages  and  capital,  194  ; 
on  rigidity  of  wages  fund, 

211. 

Tucker,  mentioned,  127. 
Turgot,  discussion  of  capital   and 
wages,  127-129. 

Vauban,  mentioned,  127. 

Walker,  residual  theory  discussed, 
109—117  ;  on  wages  and  capital, 
and  on  distribution,  289-297  (see 
Contents). 


THE   END. 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


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